Venture Corporation - Growth easing (DBSVickers)

HOLD S$8.57 STI : 3,125.87 (Downgrade from BUY)

Price Target : 12-month S$ 7.70 (Prev S$ 11.00)

Reason for Report : Post conference update

Potential Catalyst: Stronger than expected demand

• Q2 stays sluggish; T&M and Industrial pick up was less robust than projected

• Cut FY11F/12F by 10% to reflect weak momentum

• Downgrade to HOLD, TP reduced to S$7.70.

Muted near term growth. Venture participated in our POA conference on Tuesday with brisk investors’ attendance. While presenting long-term strategy and positioning of the company, management highlighted near term softness in the market place, partly weighed down by macro uncertainty. Our channel checks indicated that selected component shortages has pressured deliveries of some products while Hypercom’s volume could be disrupted by the potential acquisition by Verifone, which is now halted by order of the US court on anti-trust grounds. We believe near term growth is muted although Venture’s strategic direction remains intact.

Uninspiring 1H; cut FY11F/FY12F. Contrary to previous expectation for a sequentially stronger Q2, we now believe sales and earnings for the quarter could be flat-lined. This is consistent with Agilent’s and HP’s guidance for flattish sales in the June quarter. Coupled with modest growth in Q1, first half-year could turn out less optimistic than we had expected. We have thus cut FY11F/FY12F by 10% to reflect lower sales while keeping net margin between Venture’s historical trend of 6-8%.

Strong CFs will support dividend payout. Although bottomline growth is lacking, we are confident Venture can comfortably sustain dividend payment of S$150.8m (DPS: S$0.55) with a projected free cashflow of S$270m in FY11 even if capex rose 53% y-o-y to S$40m. This implies an attractive dividend yield of 6.4%.

TP revised down to S$7.70, downgrade to HOLD. On top of earnings cut, we have also lowered valuation peg from 15x (mean) to 11.5x (-1SD) in view of the muted growth prospect. Our TP is thus revised to S$7.70 accordingly. Notwithstanding potential share price weakness, we believe downside risk would be limited by the attractive 6.4% yield. Recommend HOLD.