I saw Venture has sustained a 50 cents dividend since 2005 and has a unbroken dividend records since 1993.
I then went further to look at its balance sheet. It is net cash company.
A renowned company that is net cash and is paying a yield of 6.7% at current price. Well, that really pips my interest.
First, some numbers.
It is not difficult to see why Venture's price is a shade of its formal glory days.
It is paying more than its earning of 47 cents in 2013. It is definitely not sustainable.
But I am not looking at Venture as a stalwart or slow grower (SPH or Singpost), but rather a cyclical play, just like YZJ and Golden Agri.
It is having +ve FCF for most of the years, the average of 13 years is 145 million, enough to pay the 50 cents dividends.
47 cents EPS is the lowest in its 13 years history!
Which begs the most important question, is Venture a has been? Just like Creative? Or could it recover? It you think it can recover, current valuation is hardly demanding. Forget about its glorious day, its average EPS is 70 cents, lets just take 60 cents as a target for the next 3-5 years. It will might be able to revert back to 55 cents dividend given out in 2011 and 2012.
I was reading their AR, jolting down notes about their products and customers. I did this by working backwards till 2009. I would go further back if I have the time. It seems 2009 is a watershed year, not because of the GFC but because that is the year the strategic shift from OEM to ODM gathers pace. Margin improve from the 4+ % in 2008 and 2009 to the 5-6% till now, the better years has past Venture.
Reading its ARs, Venture has been able to develop new products and launched them over the years, although earnings is horrible, but it seem their competencies and capabilities are intact. Almost every year from 2009, phrases like "gain new customers" and "gain market share" can be seen, although the numbers did not show the positive impact of these positive development. Most of the time, they do seem to deliver what they set to do, e.g. 2009-2010, they mention about developmental project on retail solutions, pay system, and in 2012-2013, they did roll out the POS products and the revenue did improve. I believe the POS products should be under the segment of retail solutions and industry. Of course, there are misses too, like they mention they make inroads into aerospace with an European company, but never heard of it since.
If capabilities is not an issue, how about costs? That seems to be a valid concern, since its margin has been going down for the past 3 years already. There are research report claiming Venture is on the cusp of recovery, as it has 4 sequential improving quarters in 2013. While, that is good news, I would usually read reports with a pinch of salt. 2H is traditional stronger.
Venture has been dubbed the bellwether of electronics industry in Singapore, and export numbers of electronics from Singapore is hardly strong since 2010, with the exception of 2012 Feb. (SOurce: IE singapore). SIngapore makes up 25% to 30% of its revenue.
Other risk or concerns include the fact the its CEO is already 72, there is risk of succession plan going wrong. Forummer from valuebuddies also highlighted Aberdeen constant selling in 2013. I would not be too concerned though, since Aberdeen has been net buyers in 2012, I guess some buying and selling in adjustment to Funds requirement is inevitable.
Assuming the Venture is able to recover, so what would be a good price to enter?
I would think using DCF of 3% growth and 9% discount as fair and 2% growth and 10% discount as conservative.
The price range: $5.3 to $7 (Both upper and lower price has MOS of 20% applied)
I welcome discussions to uncover further blind spots. The valuation would not apply if you think Venture will not recover, you should not touch it even if it goes to $5.3.
Hi Mike,
ReplyDeleteThanks for this. Greatly appreciate it.
I worry about competition more than anything for Venture. If it is being slowly replaced by cheaper competitors, then, it is definitely downhill from here.
Unfortunately, because I don't know this industry well enough, I cannot say anything apart from how I suspect that there are plenty of alternative suppliers when it comes to electronics. Profit margins have always been thin and could thin further in such an instance.
I like to look at businesses with healthy margins and are able to maintain those healthy margins. Of course, what is considered a healthy margin will differ from industry to industry. Some industries are just tougher than others.
Hi AK,
ReplyDeleteI do think Venture has some way to tackle competition problem. That explained the shift from OEM to ODM, customers jointly develop project to design and manufacture, and its customize, it is not a any supplier goes market. But nonetheless, competition is very real at the OEM, I think they lose the HP manufacturing of printer contracts to cheaper supplier, but use moving up the value chain as an excuse .
Hi Mike,
ReplyDeleteTypically strong economical moats are Intangible Assets, Customer Switching Costs, The Net Work effect and Cost Advantages.
Great Products,Great size (Market Share), Great Execution (Operational Efficiency), Great Management are nice to have, but do not create long-term competitive advantages.
In your research of venture, does it fall under any of the category? I have not researched as deeply as you,
When i last look at Venture, i identified that it has great products and good operational efficiency. For a while, it also seems to have good cost advantages working in its favor. Unfortunately, i have a feeling that its economic moats have been getting narrower.
This industry is not in my circle of competence, i have to be pretty sure that it continues to have good profit margins before it interests me.
Hi solace,
ReplyDeleteI didn't research venture deep...just a 1 day effort. I also do think its moat is getting narrower.
I think they are trying to increase stickiness of customers by customization and design, and moving towards higher innovation. Constant innovation of great products is a moat too, they do have the ability to churn up different items year to year.
But, they still have a seizable OEM, those will be cut throats competition. They have already lose some jobs to cheaper alternatives.
How scalable its ODM and can it gain further market share of its customers is another big question I wish to answer by looking at its customers. But I can't find its customers, just have 2 names surfacing from AR. However, we should not compare Venture purely with sweat shops manufacturer, or those that simple compete on costs. It's margin over the last 13 years already bored this out. I do think Venture is a alpha electronic manufacturer in Singapore. If we see electronic as a sunset industry in Singapore, do maybe its future is bleak. The verdict is still out of this one.
Hi Mike,
ReplyDeleteThanks for the explanation. :)
Venture is, like you said, a bellwether in the industry. Must save face. ;)
After generating some very interesting discussion at valuebuddies, I think there is more facets to research in this company. Too bad I am really busy at work. Might be a good thing too, won't be trigger happy
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