Venture Corp: 2H09 will be inflexion point

2Q09 results just slightly short. Venture Corp (VMS) reported its 2Q09 results last Friday. Revenue came in at S$846.0m, down 13.0% YoY but up 16.6% QoQ, and was 8.5% above our forecast - showing the positive up-tick as we had expected - thanks to demand pick-up for several products and market share improvement. We had highlighted in our report about how some inventory restocking activities have extended well in May and even June. While net profit came in at S$60.9%, down 7.1% but up 119.8% QoQ, it was mainly due to a fair value write-back of S$25.0m for its CDO2 investment; stripping out the non-cash adjustments as well as forex losses/ gains, earnings actually fell 43.4% (but up 29.0%) at S$40.3m, though still 6.4% shy of our estimate. For the first half, revenue fell 17.8% to S$1571.6m, or 49.0% of our full-year estimate, while core earnings of S$71.5m met 37.0% of our FY09 forecast.

Unfavourable product mix behind margin shrink. According to management, the main reason behind the margin shrinkage (gross fell from 20.5% in 2Q08 and 17.7% in 1Q09 to 15.5% in 2Q09) was the sharp 32.9% YoY and 36.7% QoQ increase in its Printing & Imaging business; a major customer has switched several programs to consignment basis thus the lower margins. Its other businesses all saw YoY drops of between 2.8% and 38.5% although most were up between 7.2% and 9.0% QoQ except for Test & Measurement which fell 3.3% QoQ. While VMS has managed to add several new customers, their contributions were not significant yet; management expects the bulk of these contributions to come in towards end 2009 onwards. It also will be pushing for improvements in gross margins once it gains more traction with these customers.

Outlook cautiously optimistic. While management noted that most of its customers were still unwilling to commit to the pace and trajectory of recovery, the business environment has improved. VMS also expects its product mix to improve towards better margin products from 2H09 onwards (will be an inflexion point) as management continues to pursue its goal in being a technology-oriented company as opposed to a pure electronic manufacturing services provider. We have raised our FY09 revenue by 0.7% and cut our earnings by 13.2% to account for the margin squeeze; but raised FY10 revenue and earnings by 8.5% and 12.0% respectively. Our fair value remains at S$9.26 (based on 12.5x blended FY09/FY10 EPS); maintain BUY.

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