Many of Venture’s customers are toning down the FY09 outlook for their businesses. As a supplier, Venture will be affected, we think.

We now expect Venture to record a sequentially flat net profit of S$40m in 4Q08. We believe Venture saw order adjustments from a few of its 140 active customers, and accordingly we forecast Venture’s revenue for 4Q08 to be slightly above S$900m, while it will dip below S$850m for 1Q09. In our 4Q08 earnings forecast we have assumed a S$40m write-down on the fair value of collateralised debt obligations (CDO) held by the company, as the yield spread of the index of investment-grade CDOs widened by 30 basis points over 4Q08.

We have also assumed S$21m in net asset-impairment charges, mainly related to Venture’s S$82.5m holding in DMX Holdings (DMX SP, S$0.095, Not rated).

During our recent discussions, the company emphasised its working-capital management and cash-generation capabilities. In order to control costs, Venture has extended its salary freeze from senior management to all employees, has dismissed a small number of contract workers and has increased the use of generic material if approved by customers.

Downward earnings adjustment. We have revised down our FY09 and FY10 revenue forecasts for Venture by 4.7% and 4.9%, respectively, due mainly to the weaker macro-economic outlook. For FY09, we now forecast Venture’s revenue to decline by 12.5% YoY. Among its various business segments, we expect the contribution from the retail-store solution and industrials segment to record the sharpest sequential decline for FY09 amid an increase in retail-store closures.

We also cut our FY09 and FY10 net-profit forecast by 14.5% and 11.4%, respectively. Though Venture could potentially write back most of its over S$110m provision on CDOs by 4Q09 when the instrument matures, we have not included any such non-operating gains in our FY09 earnings forecast.

Venture is trading at a PER of only 5.1x on our FY09 EPS forecast, while its major EMS peers globally are trading at PERs of 4.6-8.4x on our FY09 EPS forecasts. We think Venture deserves to trade at the upper end of the range due to its superior cash-generation capability, less volatile earnings base backed by diversified customers/products, and strong financial health. We have lowered our six-month target price from S$8.50 to S$5.90, based on a target PER of 7.3x (down from 9.0x previously) on our FY09 fully diluted EPS forecast.

We expect Venture to miss the Bloomberg-consensus FY08 net-profit forecast of S$234m due to non-operating charges and slowing business and therefore we expect a better investment opportunity after its 4Q08 results due on 18 February.

We maintain our 2 (Outperform) rating because of the company’s strong cash- generation capability (it has a business model that prescribes low capex but a healthy profit margin) and defensive earnings base. We think its S$0.50 DPS (a dividend yield of 12%) is sustainable and near the company’s historical-low valuations.