Venture Corporation

11 Dec 2008

Venture Corporation manufactures hardware like printed circuit board assemblies (PCBA) and photonic switches for tech giants such as HP, IBM, and Agilent.

While orders from those companies haven't greatly decreased, cost-cutting measures mean a greater pressure on pricing and therefore margins. And it is likely that given the uncertain economic environment, demand will slow down next year and lead to decreasing revenue.

Another problem Venture has is the value of its 20.7% stake in DMX Technologies, which is also locally listed. The market expects a write-off; Venture invested S$84.5 million in 2006, but the stake is currently valued at roughly S$18.6m.

On the upside, a strengthening US dollar might work in Venture's favour. Analyst Tan Ai Teng from DBS Vickers is of the view that Venture's cost-effective designs and higher value proposition of offering end-to-end solutions should also attract clients during this difficult period, and defend its margins from too much damage.

Having said that, how is Venture doing on our 5-point list?

PRICE TO BOOK (P/B) RATIO: The company stock price has generally hovered in the S$4 – S$11 range in the last 6 months. Based on its last traded price of S$4.06, the company has a super cheap P/B ratio of 0.59. It gets a tick here.

OUTLOOK: In its interim Q3 report, Venture predictably cited the global economic slowdown as a cause for concern. However to its credit, it loosely outlined various emerging trends and opportunities that it is in a position to explore. It stated that customers are now looking for total value chain management, designing more varieties, and their products require advanced process technology to manufacture. It believes it is well placed to address these demands. But no specifics or figures were provided, so the company gets a question mark here.

DIVIDEND YIELD: Venture paid out a dividend of S$0.50 a share last year, which comes out to an extremely healthy yield rate of 12.3%. Of course, it is important to note that this high figure is partly due to the fact that the stock is currently trading at fairly low price. As this is higher than our 2% threshold, Venture gets a tick.

CASHFLOW: For FY2007, the company generated S$382m in cash from operations and held a very positive free cash flow position of S$187.32m. It gets a tick here.

MANAGEMENT: According to the Business Times Corporate Transparency Index, Venture gets a score of 61. That’s above 50, so Venture gets another tick here.

DBS Vickers on November 27 upgraded the stock from a HOLD to a BUY, and believes the company is on target to pay out dividends of 12%. It set a price target of S$6.40, and also noted the company stock is currently trading at nearly a 10 year low.

Analysts surveyed by Reuters have on average an OUTPERFORM call on the stock with a price target of S$7.50.

Venture Corp is one of the 98 constituents on the Russell Singapore Value Index. The index dropped 6 pts to 1,003 on December 3.

As always, please see your licensed financial advisor before making any investment decisions

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