Venture Corporation

Maybank Kim Eng Research, Aug 14

Q2 2013 earnings was poorer by 10 per cent y-o-y but recovered q-o-q by 7 per cent to S$30 million. The better q-o-q comparison was driven by higher revenue in particular from its Test & Measurement segment, where Venture enjoyed market share gains from existing customers, and Printing & Imaging, which stabilised after a horrendous Q1.

Retail Store Solutions was decently stable given that 2012 was a very high base. Disappointingly however, Networking & Communication continued to be dragged down by a slow M&A-related transition at major customer Hypercom, which was acquired by Verifone.

H2 2013 is expected to improve, with management pointing out signs of recovery from most existing customers, while new customers won in 2012 should start to contribute.

Having said that, we believe Q3 2013 earnings will be, at best, flatline on a y-o-y basis before positive growth returns in Q4 2013, which is typically Venture's best quarter. This should be driven by optical communications customer Oclaro, where the business extraction has been picking up more momentum lately.

Free cashflow improved from just S$6 million in Q1 2013 to S$40.7 million in Q2 2013. This is in line with last year's trend and does not take yet into account expectations for a significant jump in capex in H2 2013 given that Venture still has to pay for the bulk of its S$38 million purchase of a Singapore factory. YTD capex is only about S$16 million but we expect at least S$40 million in H2 2013.

Nevertheless, given the tight way Venture runs its balance sheet, we would expect dividends to remain safe at least for FY13.

While we do not see any strong catalysts as yet in Q3 2013, we want to position for a trading buy opportunity in Q4 2013 and especially heading into Q1 2014. Typically, Venture's share price does better at the year-end when investors look forward to its S$0.50 a share annual dividend, which is yielding almost 7 per cent at this stage. With its PE ratio coming back to mean, we upgrade the stock to "hold" with a target price of S$7.63, based on 15 times FY13 forecast earnings.

HOLD