VENTURE CORPORATION

3QFY07: Creating value for sustainable margins Venture reported net profit of S$76.3m (+29.4% yoy) on sales of $935.9m (+17.1% yoy). The results were slightly better than our net profit forecast of S$74.4m. Venture incurred marked-to-market adjustment of S$6.9m for investments in collateralised debt obligations (CDOs). This was offset by writeback of tax provision of S$6.7m as the company has extended its pioneer status for production facilities in Singapore and Johor, Malaysia. Top line affected by inventory adjustment. Revenue grew 17.7% yoy but contracted 6.8% qoq. There was significant impact from one-time rationalisation of channel inventory by a major customer during 3Q07. This has led to a 20.3% qoq decrease in revenue contribution from Printing & Imaging segment to S$237m. Revenue contribution from Retail Store Solutions/ Industrial Products was relatively unchanged at S$228.3m. Top line growth was affected by significant decline of the US$, which weakened from 1.5303 in Jun 07 to 1.4852 in Sep 07 against S$. Creating value for sustainable margins. EBITDA margin expanded from 19.2% in 3Q06 to 21.5% in 3Q07. Net margin has similarly expanded from 7.4% in 3Q06 to 8.2% in 3Q07. The better margins were achieved through diversification of product and customer base and increase in original design & manufacturing (ODM) activities. Venture creates more value add for customers by providing design and test development services. Venture generated cash flow from operations of S$175.6m in 3Q07. Its cash holding has increased to S$486.9m and net debt/equity ratio has reduced to 0.06x. The company is moving closer to a net cash position. Planning long-term expansion within IDR. Venture has added 150,000sf of production floor space in Johor, Malaysia and will renovate the Penang plant to create more production floor space. The company has about 12 buildings within the Iskandar Development Region (IDR). Venture plans to expand within the IDR over the longer term. Plans to hold CDOs till maturity. Venture invested in two tranche of CDOs embedded with credit derivatives in 2004, which were valued at S$206.1m as at Dec 06. The CDOs are backed by a global portfolio of investment grade corporate bonds issued by companies in a diversified range of industries and geographical markets. There is no exposure to mortgages. Venture received regular interest payments and intends to hold the CDOs till maturity (Jun 08 and Dec 09). The investment represents 11.2% of shareholders’ funds. Reiterate BUY. We like Venture for its defensive qualities (customer relationships for high-mix business are more enduring) and strong free cash flow. Our target price for Venture is S$18.50 or FY08 PE of 15x (Benchmark Electronics: 14.5x, Flextronics 13x, Jabil Circuit 13.8x and Plexus Corp: 16.5x)