Venture Corp - Expecting a muted 2Q11 showing (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$8.55

Fair Value : S$10.59

Likely softer 2Q11 performance. Venture Corp (VMS) is likely to report a softer-than-usual 2Q11 showing, mainly due to the slower-than-usual seasonal pick up in manufacturing activity in general in the quarter. In particular, we note that Singapore's industrial production has contracted 17.5% YoY in May, further extending Apr's 9.5% drop, as global demand eased for pharmaceutical and electronic products; it is also much sharper than the street's forecast of a 9.5% drop. We also noticed a slow down in growth in the manufacturing sector, with Singapore's PMI (Purchasing Managers' Index) only coming in at 50.8. While still showing an expansion in the manufacturing sector for the eighth straight month, the reading was much lower than the 52.3 reading economists have been expecting; it was also down 1.7 points over Apr, mainly due to lower new orders and new exports as well as lower levels of production output and inventory. For the electronics sector, it posted a reading of 51.4; although still showing an expansion, it was down 1.6 points from Apr.

2H11 recovery still intact. From our recent update with VMS, we gathered from management that its customers are still somewhat cautious in terms of their near-term outlook, citing the debt situation in Europe, the anemic economic recovery in the US and also mounting inflation rates in Asia; we believe that some customers may also have been affected by the twin disasters in Japan which disrupted the global electronics supply chain. However, management added that the overall sentiment is not overly negative and many of its customers are still looking to ramp up their programs in 2H11. Indeed, we note that most Singapore-based private sector economists are still expecting the manufacturing and financial services sectors to support the country's GDP growth this year, which they have just upgraded from 5.7% to 6.2% in the Monetary Authority of Singapore's (MAS) latest quarterly Survey of Professional Forecasters. In the survey, the economists had also upgraded the local manufacturing sector's growth forecast from 5.9% to 8.0%.

Paring our estimates for FY11. Nevertheless, due to the slower-than-seasonal pickup in business activities in 2Q11, we see the need to pare our forecasts for FY11, shading our revenue estimate lower by 3.1% and earnings by 6.3%. Our fair value also drops from S$12.10 to S$10.59, now based on 14x FY11F EPS (versus 15x previously) to reflect the more muted market sentiment. Still, given the potential total return of 30% from here, we maintain our BUY rating.