Venture Corporation - Slower growth and weak US$ (DBSVickers)

HOLD S$7.27

Price Target : S$ 8.10

At a Glance

• 2Q11 net profit of S$42m in line with our estimates

• US$ depreciation continues to be a dampener

• Muted business outlook in the near term

• Maintain HOLD with S$8.10 TP

Comment on Results

In line with recently revised estimates. As we had expected, 2Q11 earnings of S$42m came in almost flat compared to 1Q11. On a yo-y basis, earnings declined 8%, on the back of a 4% decline in revenue to S$629m, largely stemming from the US$ depreciation (down 11% y-o-y). Excluding the impact of the weak US$, revenues would have grown 8% y-o-y, in line with overall volume growth. Except for Networking & Communications segment, all segments registered volume growth y-o-y, with Retail Store Solutions and Test/ Measurement/ Others registering growth of more than 15%. While gross margins remained fairly stable, net margin slipped to 6.6% compared to 6.9% in 2Q10 and 7.0% in 1Q11 due to the impact of the weaker US$ (operating expenses in local currencies).

Recommendation and Outlook

Near term outlook remains muted for Venture. This is partly driven by macro uncertainties in the US and EU. There are also some component shortage concerns affecting volumes for a particular customer. No change to our earnings estimates. 2H11 should be slightly stronger than 1H11, but we still expect bottomline to decline in FY11, partly due to the US$ depreciation. However, we are confident that Venture will be able to sustain dividend payment of S$151m (DPS: 55Scts), which implies a yield of 7.4% at current prices, and provides downside support to share price. Venture currently has net cash reserves of S$136m, after paying out S$151m in dividends during the quarter. Cash conversion cycles normalized to 79 days from 92 days in 1Q11, despite Venture continuing to carry higher component inventories for customers in wake of recent supply chain disruptions.