VENTURE (Lim&Tan)

S$7.27 - VMS.SI

• Venture’s 2Q2011 net profit fell 8.4% yoy to $42mln, dragging down 1H2011 profit by 2.5% to $83mln, below expectations. Sales fell 3.7% yoy to $629mln, bringing 1H2011 sales down 5.9% to $1.22bln.

• The steep US$ decline had negatively impacted sales in S$ terms by more than 11%, hence if measured in US$ terms, 2Q2011 sales would have risen 8% instead of falling 3.7%.

• Other factors negatively impacting bottom-line were higher labor and other operating costs due to inflationary pressures in Asia. Due to the Japanese earthquake, management also said that their customers faced component shortages in 2Q2011.

• At yesterday’s briefing, management said that the component shortage problem has since been resolved and as compared to their cautious outlook provided in 1Q2011 briefing in May’11, management has now turned more upbeat, saying that general sentiment of their customers have turned encouraging with most expecting business volume growth going forward. As well, several new products and programs are expected to be launched in 2H2011.

• Despite expecting more business going forward, management said that they are maintaining a tight rein on their overall costs, expecting instead to squeeze more productivity out of existing employees, instead of planning to add more. These cost savings should help to offset somewhat the potential continued US$ weakness going forward.

• The company continues to generate robust cash flows with 2Q2011 operating cash flow of $39mln, bringing 1H2011 operating cash flow to $66mln up from $9mln a year ago, more than sufficient to cover capex of $12mln. After paying $151mln in dividends, cash holdings fell to $338mln against debts of $202mln, giving a net cash position of $136mln. Management expects their strong cash generation abilities to continue to improve their financial position in 2H2011.

• Given the lower than expected 2Q2011 performance, we are lowering our full year net profit forecast from $207mln to $188mln, similar to last year. PE is about 10x.

• Despite the lowered profit expectations, we believe that the company can sustain their 55 cents a share dividend payment this year, translating to a payout ratio of 80%, similar to last year, giving an attractive yield of 7.56%.

• While the overall market (including Venture) will be hit hard today on the back of sharp declines in global stock markets, we believe further share price weakness for Venture would be a good buying opportunity given its attractive yield and recent sharp share price weakness ahead of its 2Q2011 results release.

• We are thus upgrading from HOLD to BUY.