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Breakdown: Venture Corp, On The Cusp Of Recovery?
Breakdown, Tradeable | 20 August 2013
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By: Simeon Ang
Articles (125) Profile

Venture Corporation, long dubbed the bellwether for Singapore’s technological sector. Venture has come a long way since its founding in 1984.

While technological stocks are not exactly hot picks in Singapore, Venture has offered sound investment qualities to investors over the years. Having released its financial results recently, analysts were quick to attempt to dissect the tech giant’s statements.

Poor Year-On-Year Performance
On a year-on-year basis, Venture’s financial performance for 2Q13 and the broader 1H13 did appear to be somewhat lacklustre. Comparing the two quarters, 2Q13 and 2Q12, revenue slid 3.9 percent from $611.8 million to $587.7 million.

From a net profit standpoint, Venture’s report did not appear to be very good either, falling 10.6 percent from 2Q12 from $33.6 million to $30.1 million. In terms of the broader 1H13, revenue was down 5.7 percent while profits decreased 16 percent.

The decline in quarterly profit was largely attributable to an over 2-fold increase in income tax provisions as Venture braced for taxes for its $3.2 million gain on disposal of investments in 2Q12.

Nonetheless, Venture’s management seem to be cautiously optimistic as they report that customer demand from its current portfolio is showing signs of recovery. Venture also hopes to benefit from block of contributions from projects won in 2012 as well as new product launches.

Analysts – Concern With Sequential Performance
Parsing through several research reports, it would seem that analysts were concentrating more on the sequential (1Q13 versus 2Q13) growth experienced by Venture. Could Venture be on the cusp of recovery even though its financials are showing negative growth?

Andy Wong of OCBC Research note that while the year-on-year comparison was not particularly good news, they point out the the sequential quarter-on-quarter momentum was helpful. They write:

“Sequentially, revenue and PATMI (profit after tax and minority interests) rose 10.8 percent and 7.3 percent respectively. All but one of its business segments grew double-digit for revenue… which we view as an encouraging sign.”

As we can see in the tables below, this is indeed right, the pick-up from 1Q13 is occurring and it would seem that Venture is recovering from its lacklustre quarterly performance back in 1Q13.

Source: Venture’s Financial Reports, Table Comparing 1Q13 And 2Q13 Major Financial Figures

Source: Venture’s Financial Reports, Table Comparing 1Q13 And 2Q13 Revenue Contributions Of Various Divisions

Andy’s Call: BUY, with a target price of $7.94 (potential upside of 7.9 percent*)

Aside from a seeming recovery on the cards, Gregory Yap at Maybank Kim Eng shares Venture’s management’s optimism for the remainder of 2013. He writes,

“2H13 is expected to improve, with management pointing out signs of recovery from most existing customer, while new customers won in 2012 should start to contribute.”

However, Gregory feels that Venture will only be able to present year-on-year growth during the fourth quarter, which is traditionally, Venture’s best quarter. He goes on to say that,

“This (the recovery) should be driven by optical communications customer Oclaro, where the business extraction has been picking up more momentum lately.”

Gregory’s Call: HOLD, with a target price of $7.63 (potential upside of 3.7 percent*)

An interesting point to note however, is that Venture’s 2Q13 results displayed a more than 2-fold jump in income tax provision. This is largely due to Venture waiting for confirmation on its tax status.

Tan Ai Teng of DBS Vickers wrote that the tax provision is a “wildcard” going into 2H13.

“… tax provisions could hit the (Venture’s) bottomline for as long as the approval of pioneer tax status remains outstanding.”

Pioneer tax status, according to the Inland Revenue Authority of Singapore (IRAS), is traditionally given to high-tech companies which introduce high-tech skills to the Singapore economy.

A company designated pioneer status is entitled to a full exemption from corporate tax for a period of up to 15 years.

Because of the low visibility with regards to Venture’s tax status, Ai Teng maintained DBS’s forecast for Venture’s earnings as a possible increase in taxes offset higher sales.

Ai Teng’s Call: BUY with a target price of $8.40 (potential upside of 14.1 percent*)

Casting doubt on Venture’s ability to regain lost footing, William Tng of CIMB felt that Venture might not be able to make up for the contraction (on a year-on-year basis) experienced in 1H13.

“The overall demand outlook remains hazy though there are signs of recovery. … we fear that the company (Venture) may not have enough time to meet our pre-results expectations.”

While there is a possibility that Venture might not be able to record full year growth by the end of 2013, William still feels that Venture has done well in improving its operating cashflow through better working capital management.

William’s Call: OUTPERFORM with a target price of $8.25 (potential upside of 12.1 percent*)

Trading Opportunity?
Overall, it might seem that analysts are confident that Venture is on the cusp of recovery. This confidence can be put down on a few catalysts (increased demand in 2H13, and increased contributions from contracts won in 2012) as well as Venture’s solid fundamentals.

It should also be noted that at current price levels, Venture’s historical dividend translates into an attractive 6.8 percent yield. Given its solid net cash position, chances are high that a $0.50 dividend at the end of 2013 is assured.

Perhaps, investors will be interested in taking up positions for a trading buy opportunity in the final quarter of the year, especially heading into 1Q14. As this is where the stock usually performs the best.

* Based on Venture’s closing price of $7.36 on 19 August 2013.

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Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

Venture Corp  15.270 -0.49 -3.11%   
Business: Co provides technology services, products and solutions. [FY18 Turnover] Advance Manufacturing & Design Solutions (AMDS) [74.6%], technology products & design solutions (TPS) [25.4%].

Insight: Apr-19, 1Q19 revenue rose 8.5% to $928.8m due to b... Read More

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