Friday, May 23, 2014

A deeper look at Venture.

My analysis is mainly doing some fact finding from the various Maybank reports, which I think are of high quality

http://sbr.com.sg/manufacturing/news/brace-another-venture-corp-pummeling-next-quarter

http://research.maybank-ib.com/pdf/document/VMS_070114_5619.pdf

http://research.maybank-ib.com/pdf/document/Venture_NDR_220114_5655.pdf

Of the 5 area of customers:

 

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Printing and imaging is the only one that is doing very badly. This is despite Venture being the sole builder of a type of portable printer for HP in 2013. There is a lot of buzz from the 3D printing sector filling this gap, even if the 3D printing does not contribute strongly in the coming quarters, how bad can it be? Its major customer is Stratasys 3D based in Shanghai. Stratasys as with other 3D companies are growing very strongly, however, how much market share can Venture take from Stratasys is questionable, especially it it is still in the prototype stage. But if there is a growth segment that Venture cannot be without in, it is 3D. VIPcolors is actually the retail arm of Venture, it sells printers made by Venture, It has launched a new product recently, late 2013. There is no inking of the demand for this product, as VIPcolors is not listed. HP printing business is still resilient, but I doubt Venture has a big market share of HP.

As for the rest of the 4 areas of customers, the reading of the annual reports of its major customers show some interesting facts. When I first looked at Venture, It is a decent company with decent FCF generation capability. However, as margins are falling, it make me wonder if the customers are deserting Venture, or has such big bargaining powers over Venture that it can squeeze them dry. I think the former is less of a worry now.

When I look at Micros, they have been outsourcing its manufacturing of its traditional workstations POS to Venture for years, and in the recent 2013 AR, added Mtablets, which is deployed in summer 2013. So it is truth, when Venture AR mentioned that they are entrusted with more responsibilities and higher value-work from major customers. Any example I found is Oclaro, another customer, from the networking and communication area, is in its second year of outsourcing/transferring its operations from China to Venture's Penang factory. It is mentioned that the products and testing done by Venture at Penang must be verified by Oclaro's customers before supplies will be ramp up. I think that explain why 2013 did not see improvement of results in this area. I believe 2014 will have significant revenue generated from Penang, as Oclaro signed an 5-year agreement with Venture, and the outsourcing is part of their restructuring plan for better profitability.

In short, I agree that the poor results of Venture for the past few years were a result of M&A activities and poor macro-economic conditions. I do not want to go into the customers one by one, but Verifone, NCR, Ailigent, Waters etc did show a good Q1 report and is forecasting growth for the rest of the year.

Next, Venture has the issue of Pioneer status of tax incentive expiring in July and another subsidary in September. Venture is confident in renewing it, and their past records has shown that they could. Given that they have been acquiring new capabilities, I think it should not be too difficult to keep the status. Of the subsidiaries that have their tax incentives expired, GES Manufacturing Services (M) Sdn Bhd has it status recently renewed for another 5 years, and Technocom Systems Sdn Bhd is approved, pending commencment date. So the tax rate should get lower.

What really attract me to Venture is the names of its customers, they are all big global players. I know, Venture might not have bargaining powers over them, but I guess the relationship is stronger than the margins suggest. I also looked at a few cash rich technology companies that gave good dividends, like PCI, and Karin. Karin margin is too low for comfort, around 2% for recent years, and its FCF generation is rather irregular for the past few years. PCI has decent margins and good FCF for most years too, however, it is highly illiquid as CH holdings already owned 75% of the shares (CH holding is another story), also, the recent plummet of earnings is worrying, and there is no information about its customers for me to do checks.

Now if Company is sound, or I least I project  it to be sound for the next 2 years, is valuation attractive. In terms of yield of above 6.5% for a net cash company, I think price is very decent. In terms of earning powers?

I took a look at his historical PE

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Forget about the lofty valuations of above 20.

With the exception of the 2008 and 2009 GFC years (Venture has exposure to CDO, and hence is badly affected), the maket seem to value Venture around 12 - 18. I expect Venture 2014 earnings to improve about 10% from 2013. If we take EPS to be 5.2 cents, at 72 cents, Venture is valued at about 14X PE. Valuation is not stretched either, although a PE value of around 12 will provide better MOS. For PE to be 12, either earnings has to jump to EPS of 60 cents, or if we keep our 52 cents earnings, prices has to drop to $6.25 cents. At $6.25 through DCF lens, it will then be a 10% discount at 2% FCF growth. Highly conservative.

Great, we have a no brainer entry place of around $6.25, that yield 8% dividend. The problem is, I don't think It will go there.

So I have to read my previous blog and remind myself to keep my itchy finger away. Waiting is a tougher game to play then I thought. Darned the trader/gambler mentality in me...

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