Published March 25, 2009

Why Venture remains a safe bet

By WINSTON CHAI

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TECHNOLOGY counters don't always come to mind as storm shelters for investors but market watchers seemed to have made an exception in the case of Venture Corporation.

Despite dwindling profits and recurring investment losses, analysts continue to heap praise on this blue-chip, sending its shares on a month-long rally after dropping nearly 50 per cent in the past year. With most contract manufacturers taking a sustained beating from the worldwide electronics slowdown, can Venture really be expected to defy the odds and retain its defensive advantage?

The root of Venture's recent resurgence stems from the mountain of positive reaffirmation following the recent release of its fourth-quarter results. Despite profits plunging 94 per cent during the period, analysts stuck with their 'buy' calls and 'outperform' ratings, citing its sizeable cash horde, prudent cost containment strategy, and strong dividend yield as key factors for their continued optimism.

And a closer examination at Venture's business fundamentals lends credence to the upbeat views. With a cash stockpile of $314.2 million and a healthy gearing ratio, the company has given itself a fair cushion against a prolonged slowdown. And despite being dogged by slowing orders and investment write-offs in 2008, the firm maintained its 50 cents dividend payout, the fourth year in a row it is doling out this amount.

To put things in perspective, this translates to 12.5 per cent yield based on Venture's share price at that time, an attractive proposition by any yardstick under current cash-strapped conditions.

StarHub, a much-hyped defensive play, yields around 12 per cent, while M1 and SingTel yield 8.8 per cent and 3.3 per cent respectively, based on their last set of full-year results. Venture's generosity is magnified when compared against other blue chips such as United Overseas Bank with its final dividend of 40 cents, along with DBS and OCBC, companies that have turned to scrip dividend schemes in a bid to conserve cash.

The key question for investors going forward is whether Venture can sustain its bounty when the year has run its course, and in all likelihood the answer is yes. While the company can't fight the ebbing economic tide, it definitely has more buoyancy compared to most of its peers in this sector.

This is because the electronics slowdown is most acutely felt in the volatile consumer space where Venture has little exposure. Its customers such as Hewlett-Packard, NCR and Intermec are all feeling the pinch and their orders are bound to fall as a result, but the decline should not be of an alarming magnitude.

Venture's focus on higher-end research and higher-value industrial products make it harder for clients to switch to cheaper suppliers, unlike mass market contract manufacturers such as Taiwan's Hon Hai Precision Industry.

Moreover, Venture has shown time and again that it has a high threshold for pain. In the past year, the biggest drag to Venture's results came from paper losses arising from a tranche of CDO (collateralised debt obligation) instruments. The mark- to-market adjustments pulled down its bottom line by $114.5 million during the year and sliced 90 per cent off the value of the mistimed investment. Despite the blow, Venture still eked out a decent profit of $166.7 million for the year.

As an added boon, the bulk of this CDO deadweight has now been shed and there's a high chance Venture can even write back the host value of this investment when it matures at the end of this year.

In addition, the currency losses it was battling last year as a result of the weakening US dollar, is also showing signs of abating in 2009 with the greenback slowly regaining its strength.

While business headwinds can only get stronger as the year progresses, these two factors would help buffer against the sales slump and give Venture more room to breathe.

During an economic drought, the game of business often becomes a matter of outlasting the competition. With its deep pockets and efficient modus operandi, Venture should be a safe bet to be among the last man standing.