Potential surprise from 2Q09 results. Venture Corp (VMS) will be reporting its 2Q09 results on 7 Aug (Friday); and after a very tough first quarter, VMS could likely provide a positive surprise in both its 2Q09 revenue and bottomline, despite it being a traditionally slower quarter. We note that the industry-wide inventory restocking activities have extended well into May, given the severe depletion in the supply chain in 4Q08 and 1Q09. In addition, we understand that VMS has continued to add new customers in its ODM (original design manufacturing) business - this is a clear indication of its earlier efforts to pursue growth in this more lucrative segment. Hence we believe it should lead to further improvement in its profitability.

Potential CDO write-backs. Another positive surprise could come from its CDO2 investment, which VMS had already almost fully marked down from the original S$167.8m to just S$10.9m as at end-1Q09. We understand that the credit markets have thawed somewhat since then and we can expect potential write-backs from even as early as 2Q09; however, we prefer to remain conservative and only adjust our numbers if/when it get its full investment back by end Dec 09. When it gets back the full amount, we believe that unless VMS has a pressing need for the funds, it could potentially pay it out as a special dividend that is worth at least S$0.50 per share.

Leaving FY09 estimates for now. For the second quarter, we are expecting VMS to post a QoQ improvement of 7.5% (still down 19.8% YoY) in revenue and a jump of 14.7% (still down 40.3% YoY) in net profit. While we believe that the recession has bottomed, the road to recovery could still be a long and arduous one. As such, we will hold off adjusting our FY09/10 estimates until we see the 2Q results and get a better sense of its customers' outlook from management. Meanwhile, the recent revaluation of the market has also led us to revise up our valuation for VMS, shifting from a very conservative 8x FY09 PER previously to a more upbeat 12.5x blended FY09/FY10 PER; this raises our fair value from S$5.64 to S$9.26. Coupled with an expected dividend yield of 5.8% (not including a potential special dividend), we upgrade our rating from HOLD to BUY.