Venture Corp: Worst likely over; Upgrade to BUY

By Carey Wong
Mon, 1 Mar 2010, 10:28:14 SGT

Venture posted its FY09 results, with revenue down 9.8% at S$3412.5m, but just 1.0% shy of our estimate, while net profit slipped 13.8% to S$143.7m, or around 6.4% below our forecast; this mainly due to slightly higher CDO losses. VMS has managed to recover just S$17.1m of its original S$167.8m CDO investment. In any case, we note that this has finally brought a closure to the unfortunate episode and reduce one unnecessary overhang from the stock. Going forward, management notes that growth projections from most of its customers are looking more optimistic, in line with the improved general market conditions and sentiment across the globe. As the worst is likely over for VMS, we raise our valuation from 12.5x to 13x FY10F EPS, which improves our fair value from S$8.69 to S$9.03. Based on a potential total return of 14.2%, we upgrade our call to BUY.

4Q09 results hit by CDO woes. Venture Corp (VMS) posted its 4Q09 results last Friday. Revenue came in at S$913.2m, up 0.7% YoY but down 1.6% QoQ; it was also 12.1% below our forecast. And due to a CDO loss of S$30.6m, net profit came in at S$16.8m, up 266.0% YoY (also recorded a CDO loss of S$57.6m in 4Q08) but down 56.2% QoQ (no CDO loss in 3Q09); however, if we exclude the CDO loss, net profit would have come in around S$47.4m, or around 16.1% ahead of our forecast. For the full-year, revenue slipped 9.8% to S$3412.5m, but was just 1.0% shy of our forecast, while net profit slipped 13.8% to S$143.7m, or around 6.4% below our estimate; this as the CDO loss had come in slightly larger than we had expected. VMS has declared a final one-tier tax-exempt dividend of S$0.50 per share, unchanged from last year.

No happy ending for its CDO investment. On to its S$167.8m investment in a derivative financial instrument (CDO2), which expired on 20 Dec 2009, it appears that VMS just managed to recover S$17.1m; this has been included in other receivables. We had earlier highlighted the risk that it may not be able to recover the full amount, as the global credit markets have taken a turn for the worst. In any case, we note that this has finally brought a closure to the unfortunate episode and reduce one unnecessary overhang from the stock.

Slightly more upbeat 2010 outlook. Going forward, management notes that growth projections from most of its customers are looking more optimistic, in line with the improved general market conditions and sentiment across the globe. VMS remains steadfast in pursing quality growth, which we expect to increasingly come from its ODM (Original Design Manufacturing) segment, which not only carries higher margins but also provides some degree of product differentiation as VMS has worked hard to develop its IPs (Intellectual Properties). Management also intends to proactively seek out growth opportunities; we suspect this may include potential M&As as the company is currently sitting on net cash position of S$343.4m (as at 31 Dec 09).

Upgrade to BUY, S$9.03 fair value. As the worst is likely over for VMS, we raise our valuation from 12.5x to 13x FY10F EPS, which improves our fair value from S$8.69 to S$9.03. Based on a potential total return of 14.2%, we upgrade our call to BUY.

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