Brace for another Venture Corp pummeling next quarter

2Q13 bears little hope for rebound.

Maybank Kim Eng expressed its very pessimistic outlook on Venture Corp, saying that the firm's tanking performance in 1Q13 will likely repeat next quarter. This is due in part to what Maybank sees as "too many macroeonomic uncertainties" to which the company has sluggishly responded. 

Here's more from Maybank Kim Eng:

Horrible 1Q13, more of the same in 2Q, visibility still low beyond that. 1Q results were bad and more of the same can be expected in 2Q. Venture is still guiding for full year growth but it is increasingly difficult to see how they will pull it off. There are just too many macroeconomic uncertainties and the company has been too slow in taking the needed actions for a long-awaited turnaround. To cap it off, capex will shoot up this year, and with a weak earnings outlook, dividends could be under pressure as well. We downgrade the stock to SELL with a TP of 6.70 (based on 13x FY13 PE) ahead of the final dividend payout. We would relook the stock below SGD7.00.

1Q13 results below expectations. While 1Q is always seasonally weak, poor economic conditions, higher taxation and lower associates’ profits also worked against Venture in 1Q13, but this was bad even by those low standards. Revenue fell 8% YoY (-5% excl forex impact), and net profit plunged 21% to just SGD28m, a 3-year low. Net margin also fell back to 5.3%, last seen in 3Q12 and below its long term targeted range of 6-8% on a poor product mix (due to a higher proportion of low margin retail store products).

Not getting better in 2Q. An anticipated recovery has not kicked in and with economies worsening, the earliest this could be seen is in 2H13, as new customers may start to contribute more significantly then and there is an easier base comparison against 2H12. For 2Q13, results are likely to remain weak and management admitted that even to show positive growth would be a very stretch target. P&I will remain plagued by a high mix of End-of-Life (EoL) products while Oclaro’s rampup is progressing slower than expected.

FY growth guidance still intact… but! Venture is still guiding for full year growth but it is becoming more difficult to see how how they can pull it off. Given its vaunted business model, could they not have avoided the 30+% plunge in P&I revenue in 1Q13, which they blamed on a high mix of EoL products from a major customer? That should have been easily foreseen. Also, the negative impact from customers who underwent M&A, eg Hypercom is already two years old. One would expect management could have been more aggressive in fixing this issue. One can only blame the economy for so long.

Dividend under pressure. Given this, Venture’s last bastion, its dividend, could also come under pressure. Its historical SGD0.50 DPS yields an attractive 6% if it can be maintained. But there is no policy! Capex, normally below SGD30m a year, will least double to SGD68m in FY13 on a factory purchase in Singapore, and may exceed SGD100m if the purchase of a large piece of land in Malaysia fully materialise. Venture has already cut its dividend by five cents last year. For now, it looks like this can be maintained but it may not be the case if the Malaysia land purchase goes ahead.