Venture Corporation

Kim Eng on 30 Apr 2012

Focus on the cashflow, not the earnings. We expect Venture’s 1Q12 earnings, out on Thursday, to have declined YoY and QoQ. This is nothing to be alarmed about, as 1Q is a traditional low season. We would encourage investors to look beyond short term earnings volatility and focus on its ability to generate cash. We argue that Venture’s solid cash flow generation puts a strong floor to its dividends, which is what the stock is attractive for. In the long term, Venture’s industry position has been made stronger by natural disasters, and its strategy of working only with the best customers. This can only enhance its longer term growth potential. We maintain our BUY call with a higher target price of SGD9.65, after pegging our target dividend yield to 5.7%, the average of the top 15 dividend-paying stocks in Singapore.

Look beyond the short term earnings. We expect 1Q12 earnings to have been SGD36-37m. Though lower QoQ and YoY, this was mainly due to seasonal weakness and nothing to be alarmed about. Barring further shocks, 2012 should see a turnaround from last year’s macroeconomic-driven shortfall. For now, we expect only single digit growth, but successful execution of its long-term strategies should pave the way for higher growth in the next three years.

Only working with the best customers. Venture is in a good position to choose only the best customers, either market leaders or scrappy second-liners intent on playing catch-up with the leader. While this strategy may take a bit longer than usual to play out and bear fruit, Venture’s target is to achieve double-digit growth rates in the next three years. But by focusing only on high-quality customers, it will be able to sustain its industry-leading net margins of 6-8%.

Great ability to generate cash. Despite occasional earnings shortfalls, Venture has consistently managed its working capital requirements well. Its always low capex has never been at the mercy of customers due to its focus only on high-quality customers. In fact, Venture consistently generates free cashflow that is well in excess of dividend requirements. In this respect, its fixed dividend policy is a strong reflection of management’s belief that cashflow generation will never be compromised.