Reported earnings rebounded strongly QoQ to $60.9m in 2Q09 from depressed 1Q levels, although it did benefit from a $25m fair value gain from financial derivatives. Adjusted for this and a $4m forex loss, core earnings was $40.3m, up 29% QoQ but still down 43% YoY. Lower tax rates in Singapore and Malaysia also added a $1.5m boost to the bottomline. No interim dividend was declared.

Customers replenished their exhausted channel inventory during the quarter, leading to the strong rebound. But margins stayed weak - up slightly from 4.3% in 1Q09 to 4.8% but still down sharply from 7.3% in 2Q08 - due to a poor sales mix. Despite a 37% QoQ jump in Printing & Imaging revenue, higher margin businesses such as Test & Measurement and Retail Store Solutions remained weak.

Despite the weak margins however, Venture maintained an AAA-rated balance sheet. In 2Q09, it added >$180m in cash vs 2Q08 as both inventory and receivables fell from a year ago. Since the start of the credit crunch, Venture has been tightening its working capital management to build up cash. We expect its annual dividend of $0.50 a share to be sustained.

Talk of HP revamping its printer supply chain in favour of Hon Hai earlier this year has gained credibility with the recent news that the two companies will build a US$3b plant in Chongqing to make laptops. We estimate that HP’s OEM business accounts for some 30% of Venture’s Printing & Imaging revenue, which of late has accounted for above 40% of total revenue. If true, this could lop about 10% off FY10 revenue.

We downgrade Venture to Hold as its FY09-10 valuations are no longer cheap compared to its global EMS peers. Excluding an obvious outlier (Foxconn at 44x current year earnings), the sector average is about 15x this year and 12x next year. On our forecasts, Venture trades at 14.5x FY09 and 13.5x FY10 numbers. Our price target of $8.84 is pegged to 14x current year forecast.