Event
The volatile operating environment is creating downward pressure on forecasts for Venture. We cut our FY11‐12 forecasts by 7‐10% and target price to $8.12 (13.5x FY11F) on the back of recent travails at major customer Hewlett‐Packard (HP), supply chain issues of a “significant” Test & Measurement client and further US$ weakness. However, Venture is staunchly protecting its cash flow and dividendpaying capacity. Margins are also likely to stay intact despite a weak topline, demonstrating its superior business model. Maintain BUY.
Our View
Changes among Venture’s customers have resulted in a need to trim our FY11‐12 forecasts further. HP’s CEO changes have created uncertainty even in the enterprise Printing & Imaging segment (17% of 1H11 revenue), which will be flattish. Test & Measurement (25.5% of 1H11 revenue) will continue to taper off due to a large customer’s inability to take enough delivery of a key component.
Industrial Products, however, is doing well on strong demand for metering instruments while Retail Store Solutions remain steady. Together, they accounted for 26.4% of 1H11 revenue. Further, Venture expects to keep net margins in the middle of its 6‐8% band due to high ODM content in its product mix and intensive cost control (eg, workforce down to 13,000 from 17,000 before the 2008 crisis).
Also, we reckon its $0.55 DPS is defensible. Management is already taking steps to reduce working capital requirements. Working capital hit a peak of $684m in 4Q10 and the target is now $550m. With component shortages easing, we expect working capital tied up in inventory to be freed, even as we expect trade payables to also gradually improve.
Action & Recommendation
Maintain BUY on Venture as the dividend yield of 8.5% (based on FY11’s first and final $0.55 DPS) is attractive and defensible. However, our target price has been reduced to $8.12 (from $9.68) on lower earnings estimates.
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