A rewarding venture
Story: Venture hit a ten-year low of S$3.90 recently on continuous liquidation prior to its removal from the MSCIIndex. With the stock down 70% year-to-date and the final round of index-linked selling over, we believe now is a good time to start accumulating Venture on the cheap.
Point: In revisiting our assumptions, we have slashed FY08 earnings by 33% to fully provide for the remaining S$90m CDO given worsening credit spread in October. We have also trimmed FY09 earnings to reflect conservative demand outlook, which we believe could potentially pressure FY09/10 revenue growth although Venture should hold up margins better relative to peers with its higher value-added ODM services.
Relevance: In spite of our steep earnings cut, Venture looks oversold at an all time low of 5.7x FY09 earningsand 0.6x P/BV. This implies that market has priced in a lot of negatives including the entire CDO write-off plus a worst-case scenario of massive write-downs for DMX and goodwill from the purchase of GES (see scenario valuations). However, we think a total write-off is unlikely because 1) management continues to perceive DMX as a long-term strategic investment, and 2) GES is still benefiting the company with stronger customer relationships and cross-selling opportunities. Our base case FY09 forecast encompassed complete write down of CDO and 10% amortization of intangibles over a ten-year period. Valuation aside, Venture is highly FCF generative (c. S$150-200m/ yr) and can therefore comfortably pay off debts (S$8m net debt at end 3Q08), and still sustain dividend payment of S$0.50/shr, translating to a solid 12% dividend yield, amid falling profits. With our revised assumption, we now see fair value at S$6.40, still pegged to 9x FY09 P/E. Upgrade to Buy.
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