By Carey Wong
Thu, 10 Jun 2010, 10:10:21 SGT

Industrial output – the measure of manufacturing activities in Singapore – not only grew for the fifth straight month in Apr, but it also grew at a faster-than-expected pace, spurred by a surge in the electronics and pharmaceuticals industries. We think that this bodes well for tech companies like Venture Corp (VMS). Indeed, our recent update with management echoes these strong manufacturing data points. As such, with the exception of its Printing & Imaging (P&I) segment, which is still undergoing a major revamp, we expect the rest of its business segments to put in a pretty strong QoQ showing in 2Q10. Hence barring a sharp slowdown in the US economy, we believe VMS should continue to ride on the global tech recovery. Maintain BUY with S$10.73 fair value (based on 15x blended FY10/FY11F EPS).

Encouraging manufacturing data points. Industrial output – the measure of manufacturing activities in Singapore – not only grew for the fifth straight month in Apr, but it also grew at a faster-than-expected pace, spurred by a surge in the electronics and pharmaceuticals industries. We believe this bodes well for tech companies such as Venture Corp (VMS). Indeed, our recent update with management echoes these strong manufacturing data points. More importantly, its customers have largely remained fairly buoyant about their outlook and order indications continue to be forthcoming. As such, with the exception of its Printing & Imaging (P&I) segment, which is still undergoing a major revamp, we expect the rest of its business segments to put in a pretty strong QoQ showing in 2Q10 (results are likely out 5 Aug).

Component shortages are persisting. But management notes that the components shortage issue (mainly for interface I/Cs, capacitors and switches) remains and may still take a while to ease. Based on dialogues with its suppliers, VMS reveals that not everyone is keen to expand capacity due to the ongoing debt issues in the Euro zone; some are still adopting a wait-and-see attitude and making do with temporary measures to increase efficiency of their existing facilities. VMS assures us that its customers are well aware of the situation and have given the green light to stock up on components, especially those with a longer lead time; this may result in slightly higher than usual inventory of around four months this year versus the usual three months. While working capital is also expected to increase, VMS has ample internal funds (net cash of S$370m as end Mar 10) to deal with the situation.

Little, if any, impact from the EU crisis. As for the EU crisis, management adds that it has very little exposure to Europe as a whole; this as most of its transactions are in USD and the direct sale to customers outside of Asia Pacific amounts to around 6% over the last two years. Although some of its OEM customers do export to the EU, VMS notes that some of them have already started to reconfigure their products for the US market since the beginning of this year. Hence barring a sharp slowdown in the US economy, we believe VMS should continue to ride on the global tech recovery. Maintain BUY with S$10.73 fair value (based on 15x blended FY10/FY11F EPS).