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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Venture = Better momentum, solid cashflow

Venture continues to positively surprise with its strong performance. Excluding one-off gains, it reported net profit of S$40.2mn (+30% q-q), 25% ahead of our estimates of S$32.1mn (Exhibit 1). One-offs included a gain of S$25m as mark-to-market value of CDOs recovered, if hindered by a forex loss of S$4.3mm.

The surprise came from 2Q09 sales of S$846mn (+17% q-q), significantly ahead of our estimates of S$704mn. We believe the sales growth reflects Venture success in expanding into full configuration printers for its largest customer HP. (Note: sales to printer segment grew 37% q-q, ranking as the fastest-growing segment). Given that the complete assembly business has lower margins, Ventures’ gross margins fell 90bps q-q to 9.6%. That said, despite the lower gross margins, EBIT margins rose 27bps q-q to 4.4%, reflecting cost-cutting.

In this downturn, several smaller CMs, were faced with lengthening cash cycles, as OEMs asked for better terms. In contrast, Venture has made solid improvements. Cash cycle in days fell by 17 days q-q to 61 days in 2Q09, versus typical 70-75 day levels. This marks the lowest levels since FY05. This resulted in operating cashflow coming in at S$70mn, (versus profit of $40.2mn); this brings 1H09 operating cashflow (OCF) to S$169mn and free cashflow (FCF) to S$158mn for an OCF yield of 14% and FCF yield of 13% (annualised).

The main cut came from inventory — which fell by 20 days to 53 days. We believe the cut was owing to finished good inventory. Given the high-mix nature of products Venture makes, these levels strike us as too low. Indeed management said they are scrambling to get components as business momentum improves.

In our view, cashflow and margins will set Venture apart from its EMS peers during this downturn. Given Venture’s success in expanding into full configuration printers for its largest customer HP, we now forecast a 10% y-y drop in sales (earlier: -25.4% y-y). For FY10F, we now forecast sales growth of 11.8% y-y (earlier: 10.1% y-y) to reflect the new customers as discussed above. We have raised our profits by 19.9% for FY09F and 13.9% by for FY10F.

Given earnings uncertainty across the EMS segment, we use P/BV as a valuation metric. The US EMS players have been fairly aggressive in cleaning their books, writing off large goodwill balances. By contrast, goodwill at Venture stood at 34.6% of equity at end-2Q09. To make an apples-to-apples comparison between Venture and peers, we strip out goodwill from BV to derive adjusted BV. In addition, we add back net cash/share (S$1.31 at end-FY09F) in arriving at our price target (methodology unchanged). We believe that this compensates for Venture’s cash on balance sheet, versus debt for its peers. Our revised price target is S$10.06 (previously S$8.86).

Upside to our cash balance could come from recovery of CDO maturing on 20 December, 2009, will raise cash per share by an additional S$0.44. Management believes they can recover the full amount when the CDO matures, but to be conservative, we await the cash inflow. Downside risks to our price target could stem from delays in ramp with new customers in FY10F.

Venture - Strong demand for consumer products

Outlook — VMS describes the current situation as “load and chase” – customers are over-loading EMS players and repeatedly chasing deliveries. It does not rule out some customers resorting to double bookings to fulfill enddemand and in view of industry supply chain congestion. 2Q09 revenue could have been higher if not for constraints on labor and components.

Strong demand for consumer products — Venture saw more orders for “capexlight” products as many firms are still not willing to commit high capex. Printing & Imaging (P&I) (being closest to the consumer electronics segment despite serving corporate customers) saw a substantial QoQ revenue increase, while Test & Measurement (which involves huge customer capex) saw QoQ revenue contraction. Visibility remains poor as customers are still “not prepared to commit to the pace and trajectory of recovery”. Inventory channels remain very lean.

Gaining new customers — Venture added 7 new customer accounts recently across various industries including Medical, Aerospace, Instrumentation, and Printing & Imaging. The strategy is to increase revenue contribution from ODM and compensate for any potential loss of a major customer in P&I.

Expanding margins — Mgmt says P&I revenue improved significantly QoQ due to the shift towards turnkey for a major customer which was difficult to turn away. However, going forward, much emphasis will be placed on shifting existing and new customer accounts’ product mix away from ESP (~15% gross margin) towards ODM (18-25% gross margin) and Enterprise Solutions (>40% gross margin) to capture wider margins. VIP Color printer developed with HP was cited as an example of an Enterprise Solution that was highly profitable.

Cash conversion cycle and dividends — Management says there is little room for further cash cycle reduction as working capital has been substantially lowered, including a 15% qoq reduction in inventory. Management has reiterated FY09E DPS of S$0.50 given strong +FCF of the Group. Management remains very cautious on possibility of full CDO write-back and says future write-backs are uncertain given the nature of the financial product.

Venture - In a recovery phase

In Venture’s recorded 2Q FY09 results we liked the recovery in revenue, increased traction with customers for ODM projects and strong free cash flow, while we disliked the slow recovery in recurring net profit margins.

Better-than-expected 2Q FY09 results. Venture’s net profit for 2Q09 was S$61m, above our and Bloomberg consensus forecasts due to a S$25m write-back of collateralised debt obligation (CDOs) and a higher revenue base. Revenue for 2Q09 was S$846m, up 17% QoQ (-13% YoY), above our forecast of S$818m due to strong sequential growth in the printing and imaging segment (+37% QoQ). In 2Q09, all other business segments recorded sequential revenue growth except for the test and measurement segment. Core net profit margins in 2Q09 rose to only 4.8%, up from 4.3% in 1Q09, due to pricing pressure and a change in product mix. Venture generated about S$70m in free cash flow in 2Q09 due to a reduction in working capital (down S$75m QoQ) and increased operating profits. As at the end of 2Q09, Venture holds S$20.7m CDOs in book (12.3% of host value).

Positive on outlook. Management is cautiously optimistic about its 2H09 business and expects core profit margins to recover moderately due to a weak product mix. Venture has observed an increased lead time of certain components (including connectors). Its workforce is also fully utilized now. In recent months Venture added many new projects and customers for its low-margin EMS and its high-margin ODM/Enterprise solution businesses. The company expects a contribution from these products beginning next year. Venture expects its mine tracing and RF surveillance systems to contribute revenue beginning in 2H09. The company also engaged one European aerospace customer in 2Q09.

We maintain our six-month target price of S$10.00, based on a fully diluted target PER of about 14.3x on our FY09 earnings forecast (about 12.0x on our FY10 forecasts).

We raise our 2009 revenue forecast by 1.5% on higher contributions from printing and imaging. We lower our net profit forecast by 3% on lower margin assumptions.

We maintain our 2 (Outperform) rating because: 1) we believe earnings from highmargin product segments should rise next year in line with a recovery in the IT investment cycle, 3) we like Venture’s strong free cash flow, and 4) we see upside potential to the FY09 cash dividend (subject to the recovery of CDO money).

Venture - optimism into 2H, uncertain growth trajectory

Venture reported June-quarter revenue of S$846.0 mn (-13% YoY, +17% QoQ), and net profit of S$60.9 mn (-7% YoY, +120% QoQ). Excluding gains on its CDO portfolio (S$25 mn) and forex losses then, core earnings at S$37.1 mn were in line with our estimates.

All business segments saw sequential improvement in sales (up 7-37%), with the exception of test/measurement/others (-3% QoQ), which continued to reflect industry over-capacity, and anaemic capex spend.

Gross margins fell from 20.5% to 15.5% YoY, on less favourable mix (HP’s full product configuration model contribution), coupled with pricing pressure. Working capital management stayed tight, which drove S$72 mn in operating cash flow, and helped Venture end the quarter on a S$219 mn net cash balance sheet.

Despite optimism from Venture’s clients on 2H09 prospects, the growth trajectory remains uncertain, and hence we have kept our forecasts largely intact. With the stock’s outperformance so far, and limited upside to our 13x P/E S$9.25 target price, we downgrade our rating to NEUTRAL (from Outperform).

Venture Corporation: No surprises

Core results in line. Bottomline of S$60m included S$4m of forex losses and S$25m of CDO marked-to-market gains, without which, core profit would be S$37m. Sales contracted 13% yoy but grew 17% q-o-q to S$846m, ahead of our S$766m forecast. All businesses grew except Test & Measurement. Printing & Imaging was the outperformer with a 33%y-o-y and 37% q-o-q rise but the increased portion of turnkey projects did not result in margin improvement. Core net margin was firm on the quarter at 4.4% but fell 2.7% pts y-o-y.

S$25m CDO marked-to-market gains has raised Venture’s CDO to 12.3% of host value (S$168m) from 6.5% in Q1.

Rock solid balance sheet with S$219m net cash. Venture tightened working capital further as cash conversion shrank to 60days (1Q09: 75, 2Q08: 70), generating over S$60m of positive FCF.

M-o-m growth in 2H is expected but with little margin improvement as turnkey model continues to dominate. In fact, our industry checks indicated that the withdrawal of low value HP printers was deferred. More positively, Venture has won more new customers in Q2 than the whole of last year. Most of these new engagements (digitized receivers, Minetracer, aerospace, industrial etc) entail higher value added services and would start contributing in FY10.

Keeping forecast and S$9.40 TP. Excluding CDOs, Venture has achieved 45% of our FY forecast at half time. We are confident the company remains on track to meet our expectations with a seasonally stronger 2H. Maintain buy with unchanged TP of S$9.40 (15x blended FY09/10 PE).

Venture - Uncertainty In 2010

Excluding the $25mln gain on derivative financial instrument, $2mln gain on disposal of fixed assets and $1.18mln tax writeback, operating profit of $32.7mln (which includes a forex loss of $4mln due to weakening of the US$), down 55% yoy and down 18% qoq was 34.6% below consensus expectations of about $50mln, reflecting weaker than expected contributions from higher margined products such as test & measurement and retail store solutions.

While the weaker yoy comparison is as to be expected, the weaker qoq bottom-line performance in 2Q09 is in stark contrast to the general technology industry which has seen a sharp rebound after the very depressed 4Q08 and 1Q09 performance.

Looking ahead, while their customers are generally more optimistic about 2H09 prospects, they are not able to commit to the pace of recovery in orders, reflecting the uncertainty of the global economic environment.

Further, we understand that Venture’s non-ODM business with HP which had contributed about $600-700mln in sales or 18% of sales would be negatively impacted starting 2010 due to Hon Hai’s new entry into this business segment. Similar to Venture, other HP suppliers such as Jabil and Calcomp will similarly be negatively impacted. Mass production has started recently for Hon Hai and is expected to pick up in 2H2009 and even more strongly going into 2010 with their market share expected to rise from zero currently to a significant 50% by 2011.

As a result, Venture’s 2010 earnings would likely be negatively impacted notwithstanding the fact that they expect new contributions from new customers as well as new products.

While the stock has corrected from its $10.26 intra-day high hit at the end of July’09, it has climbed a robust 120% from its $3.90 low hit at end Nov’08 to $8.57 currently. With its PE of 13-14x already in line with the world’s largest contract manufacturer, coupled with uncertain prospects in 2010 due to the loss of HP’s non-ODM business, we are maintaining our SELL recommendation.

Venture Corp - Extra shine from a better 2H09

We upgrade our 2009 earnings forecast by 12% as we anticipate that 2H09 will be much busier for Venture as technology firms respond to overly lean inventories across 1H09. We continue to rate the stock Outperform with a new target price of S$9.80 (vs S$8.30 previously).

Recovery has started in 2Q09. HPQ’s super lean inventory, enough for just 25 days of sales at end April, likely helped Venture to get busy in 2Q09 and increase revenue by 12% QoQ, a positive contrast to the 20% QoQ revenue contraction in 1Q09. Venture will report 2Q09 results on 7 August, where we expect net profit of S$37m, +32% QoQ (ex CDO related accounting gains).

We expect further positive momentum in 2H09 as Venture has rehired up to a third of the positions reduced in 4Q08. Better utilisation in 2H09 will likely improve Venture’s operating margins, which we believe will lead to a 30% HoH improvement in operating profits. We still peg these improvements within a generous inventory restocking framework (similar to the scenario back in 2001/02). We have not yet adopted the view that meaningful end demand growth has returned and thus have not materially changed our forecast for FY10 – this will thus be the fuel for the next leg-up in share price upgrades.

A bonus from its CDO portfolio? Venture’s S$168m worth of CDOs (now booked as mere pennies to the dollar) matures 20 December 2009 and the current spread on the Markit CDX North America Index has further improved to 116bp (vs 137bp at end June and 237bp at end March), improving the probability of some recovery of the principal. While we would expect some mark-to-market benefits from the 2Q09 results onwards, the real benefit for shareholders would be a special dividend – we believe any cash realisation from this portfolio will raise the potential of a boosted dividend for next year.

We have raised earnings forecast for FY09 by 12%. We have not factored any addition from gains from its CDO portfolio into our forecast for 2009. 12-month price target: S$9.80 based on a DDM methodology.

Venture Corporation: Stronger momentum boosts upside

Recovery underway. Our latest company update points to higher momentum throughout Q2 (except for RSSI and TMI), as customers stock up ahead of the buying season in 2H. This sequential growth, we believe, will sustain through 4Q09, bolstered by seasonality & demand recovery, which is underpinned by incrementally positive macro development. Contrary to market concerns of erosion at Printing & Imaging, P&I appears to be outperforming as Venture, through full configuration offering, continues to strengthen its position with HP in existing and new platforms.

Margin pressure short term pain, long term gain. We were previously concerned by the sharp plunge in margin as Venture switched to full turnkey for HP in Q1. However, as Venture continues to secure new ODM platforms from this customer, we appreciate that full turnkey is the last mile solution necessary to complete the total value chain management, which ultimately would enable Venture to strengthen customer alliances and stickiness in the long term. For Q2, we expect net margin to inch up 0.5%pt q-o-q to 4.8%.

Upgrade to Buy, revised TP to S$9.40 from S$6.50 previously. In tandem with a higher profit forecast and a rollover to average valuation peg of 15x PER (vs previous peg of 1SD valuation of 11x PER), our new target price is S$9.40, translating to 15% price upside.

Venture Corporation - On track to recovery

We raise Venture’s sales estimates for 2009/10/11 by 1.1%/1.6%/2.0% factoring in the expansion of its printing and imaging fulfilment services from Asia to other regions. Our checks with Venture’s management give us confidence that it will maintain its margins. Additionally, we expect Venture to benefit from increased contribution from several Original Design Manufacturing (ODM) projects in its sales in 2010 and beyond.

Our review of Q109 results of Venture’s key clients broadly suggests a cautious outlook. Its printing and imaging client, HP indicated sluggish IPG demand, while its storage business clients EMC and IBM reported weakness. Agilent, its test and measurement client guided for around 25% YoY sales decline in 2009. However, in the RSS business, the outlook was relatively positive from Hypercom and Micros Systems.

Contrary to the market perception that Venture lost its HP business to Hon Hai, our checks confirm that it was Cal-Comp that was actually losing business to Hon Hai. We continue to believe that Venture’s business model is defendable, given its diversified product mix as well as client mix, apart from its focus on delivering high-value added services.

We raise 2009E/10E/11E EPS from S$0.51/S$0.65/S$0.69 to S$0.57/S$0.72/ $0.77 factoring in potential sales and margin upsides. We maintain our Buy rating and raise our VCAM-based price target from S$7.2 to S$8.0.

Venture Corp - A take on inventory restocking trade

We give Hewlett Packard’s (HPQ) 2Q09 results a closer read to gain insight on the rate of technology inventory destocking. We maintain our Outperform rating on Venture with an unchanged target price of S$8.30.

Halfway mark for inventory restock trade. HPQ has managed its inventories well – inventories declined 25% YoY, keeping pace with the 19- 28% YoY decline for its three hardware divisions. Its current inventory position is lean at 25 days, below its usual 30+ days run rate (this though is noisy data as we cannot strip out the impact of the EDS acquisition). We have said in a previous note that two sequential declines of 30% QoQ in semiconductor shipments over 4Q08–1Q09 (similar to 4Q01–1Q02) would mean that the current inventory restock phase would last six-to-nine months, the same as in 2002. Based on this framework, and taking February–March as the point when fresh orders were handed out, we suspect that HPQ’s suppliers are now at the halfway mark on their inventory restock trade.

‘Stronger’ in China. While HPQ offered no fresh clues on any real pick-up in demand, it did say that the improvements it saw in China were material (HPQ has 12% PC market share in China), and that small improvements were also seen in the US consumer segments. HPQ’s overall revenue guidance for next quarter was soft though at a 4–5% decline vs a 2–4% decline previously. Print and imaging trajectory in line. Print revenue declined 23% YoY, with the sharpest fall in consumer printers (-36% YoY). Overall printer unit sales declined 27% YoY, which would be within range of the 35% EBITDA decline we expect for Venture in FY09.

For Venture, beyond operational improvements, we are also looking for CDO mark-to market benefits from 2Q09 onwards. Its CDO portfolio at end-1Q09 was only 3.5% of par value of S$168m. We would expect some mark-to market benefits from 2Q09 onwards. This portfolio matures on 20 December 2009 and we believe any cash realisation from this portfolio will raise the potential of boosting the dividend for next year.

12-month price target: S$8.30 based on a DDM methodology. Our DDM-derived target price of S$8.30 implies an FY09E PER of 11x. Venture shares have risen by 52% YTD vs 28% for the STI. We believe its capex-light ODM model will still to allow it to pay a S¢50 dividend in FY10.

Venture: Cautiously improving 2Q09 outlook

Tough 1Q09 as expected. Venture Corp (VMS) reported its 1Q09 results last weekend, where the results reflected a tough quarter as expected. Revenue fell 22.7% YoY to S$725.5m, coming in about 4.5% shy of our forecast, as it had suffered sharp falls (~30%) in almost all segments of its business, except for Printing & Imaging (P&I). We note that it was due to the shift to a full product configuration model by a key customer, which resulted in positive revenue impact but without the attendant margin i.e. very little value-add from VMS on these products. Net profit slipped 50.8% YoY to S$27.7m, and was 1.0% shy of our forecast. Despite excluding a forex gain of S$9.1m and a marked-to-market impairment loss of S$12.6m for its CDO, core earnings still showed a 57.2% YoY drop.

2Q09 outlook cautiously improving. Although management expects 2009 to remain challenging, it also noted that it has seen some improvements in some customers' forecasts; this has already resulted in monthly improvement in sales since late Feb. VMS will continue to pursue growth through addition of new customers, which we understand will be through its ODM projects - management revealed that there were >25 such projects under development and has made entry into the aerospace sector with a reputable new customer. In the longer term, it targets to develop as many as 10 solution enterprises from its existing operations (mainly those in product marketing and distribution channels) - to enhance its value creation.

Potential CDO writebacks. VMS has already almost fully marked down its original S$167.8m CDO2 investment to S$10.9m, and should credit markets improve, we can expect potential writebacks in the next few quarters; however, we prefer to remain conservative and only adjust our numbers if/when it get its full investment back by end Dec. Meanwhile, we believe our FY09 estimates already reflect the still uncertain environment and we will leave them intact until we see more concrete signs of recovery. As such, our fair value remains at S$5.64 (based on 8x FY09F PER). As the stock has run up nearly 25% since our upgrade in March, and the current prices exceeds our fair value by 4.7%, we downgrade our rating to HOLD; but we still think that the company remains fundamentally sound and its S$0.50/share dividend payout remains sustainable (8.4% yield).

Venture - YoY profit plunge was still above expectations…

As reported, revenue fell 23% to $725.5m while net profit plunged 51% to $27.7m. Adjusted for a $12.6m CDO mark-to-market provision however, Venture did better than expected with a normalised net profit of $40.3m. This was despite an across-the-board yoy decline in revenue (of approximately 30-35%) in all segments except Printing & Imaging, and a fall in EBITDA margin to 6.5% (vs 9.3% in 1Q08 and 8.9% in 4Q08).

Despite lower revenue in other segments, P&I revenue rose 6% yoy to 35% of sales in 1Q09. Officially, a key customer shifted to a new supply model with little profit margin. It seems likely the customer was trying to lighten its balance sheet, a common practice for publicly-listed manufacturing companies that need to “improve” their numbers before reporting financials. We note Venture’s inventory fell only 12% yoy compared to the 23% decline in sales). If so, the growth is likely to be a blip.

Although sentiment remains weak for the most part, management pointed out that some customers’ forecasts improved during the quarter, suggesting that they had over-reacted to the economic downturn and are now restocking their channels. In the near term, management reported that monthly orders continue to improve after bottoming out in Jan-Feb. Sequentially, 2Q09 should show improvement over 1Q09.

Despite the relatively high inventory levels, balance sheet strength continued to improve qoq and yoy. Net cash rose to $304m or $1.11/share (vs net debt of $25m in 1Q08, net cash of $192m in 4Q08) despite repaying $37m in borrowings during the quarter. Management is still not satisfied, believing that there is further room for improvement, especially in the area of payables.

There is a significant gap between Venture’s share price performance to-date and the tech stocks in Taiwan, suggesting there is room to play catch-up, especially since industry newsflow remains relatively positive. Further, with Venture’s balance sheet still on the mend, we reckon the dividend yield of 8.4% at current levels is safe. We therefore maintain BUY on the stock with a price target of $6.64 based on 10x forward EPS.

Venture Corporation: Continues to generate robust cash flows

1Q09 net profit at S$27.7m that equated to a 50.8% decline YoY was below our forecasts as CDOs losses were greater than we had forecast. While bottomline was also below the consensus forecast of S$34m, topline during 1Q09 at S$725.5m which came in 22.7% lower YoY was nevertheless better than the mean market consensus at S$713m.

Very strong cash flows. Inline with our expectations, Venture continued to pare down its debt and has now S$1.11 in net cash per share that translates to 18.6% of market cap. More importantly, despite this current market downturn, Venture had managed to boost its net operating cash flow tremendously from S$5.6m in 1Q08 to S$99.1m in 1Q09 due to effective cash management skills – this in turn equates to positive FCF per share at S$0.353, notably higher than its 1Q09 EPS at S$0.101. We therefore continue to believe that our forecasted year-end dividends of S$0.50 are also achievable.

Short-term outlook is improving. Venture had mentioned that its 1Q09 numbers were mainly affected by a dull month during Jan 09. However, it added that a pick-up had happened during Feb and Mar due to the replenishing of inventories. Furthermore, management added that forecasts given by several of its clients have been good and therefore would be expecting a better 2Q. However, Venture also professed that as it does not know how long this recovery can last, it would choose to be cautious.

Recommendation. With Venture’s strong cash flow generating attributes, sustainable dividend yield of 8.4% and an improvement in its macro-outlook for at least the short-term, we maintain our BUY recommendation. Additionally, we have chosen to peg a 2.0% terminal growth rate to our dividend discount model as we believe that our previous assumptions at 1% have been too conservative given that the main drag on its profitability (the CDOs) have largely been removed going forward. Our target price is accordingly raised to S$6.72, from S$5.92 previously.

Venture: maintain Buy and introduce VCAM

We believe Venture’s high mix/low volume business model combined with its broad client portfolio has helped improve its gross margins to 20% in 2008 from 16.8% in 2004. Supported by dependable management, diversified customer base and its focus on providing high value-added design services, instead of competing on pricing with other EMS peers, we expect Venture to maintain its operating margin at 6-8% in coming years.

We tracked earnings of Venture’s key customer IBM, which reported lower than expected hardware revenues, while reiterating its 2009 EPS outlook of US$9.20. However, we expect hardware demand to remain challenging throughout the year, given the constrained IT budgets with greater focus on reducing expenses rather than building IT infrastructures.

We maintain our 25% q/q sales decline estimate for Q109, while raising net income estimate to S$33m after downwardly adjusting CDO-related write-offs for 2009. We forecast Q209 revenue/earnings to be stable at S$705m / S$34m.

We revise our 2009E/2010E EPS estimates from S$0.51/0.73 to S$0.61/0.72 factoring the CDO related adjustments and introduce 2011 EPS of S$0.76. We continue to derive our price target using DCF-based methodology but now explicitly forecast long-term valuation drivers with UBS’s VCAM tool.

Venture Corporation: Navigating well; BUY Price Target : 12-month S$ 6.80

We expect Venture’s 1Q09 operating profit to fall 29% y-o-y to about S$39m on sales of S$633m when the company reports result on 30 April. In line with house view for a 2H recovery, we have re-rated valuation peg to normalized early cycle PER (NECP) of 11.5x, from 9x previously. Consequently, our new TP is S$6.80. Maintain Buy.

Widening 1Q09 revenue q-o-q decline to 30% from 20% previously. Our recent update indicated that Retail Store Solutions and TMI have contracted more than expected while other SBUs are easing within expectations. Venture’s printer business is pretty much intact; industry sources indicated that Foxconn’s projected run has hit some problems. Operating margins are also trending within expectations, thanks to continued cost control and operational efficiency.

Near term visibility is low but forward planning encouraging. In this season of low tides, Venture is careful not to build volume because visibility is only limited to May. However, there appears to be some demand traction in its future build plans although the phase-in is gradual and it is by no means a massive restoration for end demand.

Maintain Buy, revised TP to S$6.80. We have cut FY09 earnings by 11% to account for lower than expected Q1 earnings. Notwithstanding, TP is raised to S$6.80 as we lift valuation peg to 11.5x (NECP) from trough of 9x previously. Our FY09 forecast did not include provision for the remaining S$18.8m of CDO investment because we expect Venture to write back a significant amount when the instrument (host value: S$167.8m) matures in Dec 2009.

Venture still fundamentally strong

1Q09 will be a very tough quarter. We recently caught up with Venture Corp (VMS) for a quick update. As with most, if not all, manufacturing companies, 1Q09 is turning out to be a very tough quarter for VMS, given the drastic slowdown in global economy. As a recap, Singapore's NODX (non-oil domestic exports) fell 34.8% YoY in Jan - the most in 22 years - weighed by a sharp 38.4% plunge in electronic exports. And the picture for Feb is not much better - Bloomberg's survey expects NODX to slide 27.5% and electronic exports by 32.0%. Things are also unlikely to improve much in March either, says management, as the end market continues to be very weak.

Uncertainty about HP orders. In any case, we are not too surprised, given that one of its biggest customers - HP - has recently guided for current quarter earnings to come in below estimates. Venture derives as much as 28% of its revenue from Printing and Imaging. And speaking of HP, market has also been swirling with talks that it is looking to revamp its printer supply chain; this follows the PC giant's recent venture with Hon Hai (Foxconn) to set up a PC factory in Turkey. Those said to be affected by the shake up include Cal-Comp, Jabil and VMS. But we understand that the reallocation change likely involves HP's consumer products like inkjet printers - while this would affect VMS' OEM business, its ODM business (mainly industrial printers) should remain largely intact.

Working to contain costs. In light of greater uncertainty and the slower orders, VMS has put several measures to contain costs and improve efficiency. Key among them include reducing non-essential staff by letting contract workers go; stopping over-time and reducing shift schedules; negotiating all contracts like utilities to bring cost down. VMS will also manage its inventory more actively and reduce holding cost. And we believe that its experienced and proven management team will be the differentiating factor in making everything work.

Paring our estimates further. Following the recent developments, we have pared our FY09 estimates for revenue by 1.4% and earnings by 7.0% (assuming a further S$12m MTM loss); FY10 revenue estimate pared by 5.8% and earnings by 6.6%. Based on an unchanged valuation of 8x FY09F PER, our fair value eases from S$6.06 to S$5.64. As we also expect VMS to maintain its generous dividend payout (S$0.50/share this year 11% yield), we retain our BUY rating.

Venture - Forecasts slashed but $4.01 should be good support

Venture’s share price pulled back sharply from a results-induced rally last week on rumours that major customer Hewlett Packard could be shaking up its printer supply chain again, a move that could adversely affect the non-ODM side of Venture’s business with HP, as well as recent management feedback that HP’s orders in Jan-Feb to Venture have already fallen by 20-50% across product lines.

There is talk that Hon Hai is taking market share in HP’s printer business away from existingsuppliers such as Calcomp, Flextronics, Venture and Jabil. HP’s printer shipments plunged 33% in 1Q09. While Venture has increased ODM business (enterprise printers) with HP, its non-ODM business (consumer printers) could be hurt by allocation shifts. ODM accounted for 35% of sales in FY08, up from 25% in FY07.

Depending on the product line, HP’s orders have apparently fallen by 20-50% yoy in Jan-Feb in a knee-jerk reaction to disappearing demand that has caused channel inventory to jump. It is still too early to tell if Mar will stabilise. Further, management hinted that while its ODM business with HP is secure, the development cycle could extend longer than expected and there may be less volume benefits in FY09.

We have slashed FY10-11 forecasts by 25% and 19% on the back of HP, but as we do not expect Venture to go into the red, we believe a good support level will be its shareholders’ equity stripped of goodwill and CDO of $4.01.

The bad news still ahead in 1H09 should create volatility in the share price that will allow investors to build trading positions in the stock from time to time. However, we think it is too early to build long-term positions as Venture still trades at a premium to similarly cash-rich peers, even on a net cash-stripped PB basis - a method we believe is more conservative than price-to-earnings or even normal price-to-book.

Venture - CDOs marked to almost nothing but risk of non-recovery is rising

Venture reported 4Q08 net profit of $4.6m (-94% yoy), which included $57.6m in mark-to-market charges for its remaining CDOs and $6.3m in impairment charge for an associate company. Adjusted 4Q08 net profit was $68.5m, 18% lower yoy and 2% lower qoq, slightly below market expectations of $72m. However, revenue of $907m (-6% yoy) was in line with expectations.

The good news is that Venture ended the year with $192m in net cash, sharply turning around from the debt it took on to acquire GES in 2006. In 4Q08 alone, it generated $198m in free cashflow as inventory was cut from a peak of 64 days in 3Q08 to 54 days in 4Q08, in line with its historical norm. As such, its usual dividend of $0.50 a share was declared.

With the world economy in shambles, management optimistically expects that there could be a sharp drop-off in orders (perhaps 20-25% in magnitude) following which there would be a slow phase of inventory rebuilding, with 1Q09 likely to be the ugliest quarter. However, Venture believes it has a strong pipeline of ODM projects for 2009 that will stand it in good stead.

As at end-FY08, Venture is left with only $18.8m in CDO exposure (out of $167.8m) but the CDOs only expire in Dec 2009 and the risk of non-recovery could be rising. There has been defaults among some of the underlying companies but being a holder of senior debt, there is still enough subordination buffer to prevent the losses from affecting Venture.

With 1Q09 looking shaky for most tech companies, we believe a better time to consider the stock for investment would be after 1Q09, when we can better assess how the demand scenario is shaping up. As of now, we believe most companies are cutting inventory to clear their channels and that will have a negative impact on the supply chain.