Outlook brightening, upgrade to BUY. We upgrade Venture Corporation to BUY from HOLD in anticipation of an earnings recovery this year, as well as renewed interest in the stock on account of this and the sustainable dividend yield of almost 7%. At 14x P/E, the stock currently trades at below the 18-20x P/Es of its key comparables, and our new target price of SGD8.70 (16x FY14E EPS) teases 14% upside. Almost all its major business segments are expected to enjoy stable revenue growth in 2014E, with the Test & Measurement and Retail Store Solutions divisions possibly riding a cyclical upturn. Come 2015, a hot new product could be added into the mix, namely, 3D printer, where the valuations of the key industry players have reached heady levels of 50-70x earnings.

Earnings poised to recover in 2014. We expect Venture to see earnings growth pick up by 11% in 2014E as its businesses recover from the poor performance in 1Q13. Potential cyclical upturns in the Test & Measurement and Retail Store Solutions segments, as well as fresh opportunities with new customers and new products such as 3D printing, could also result in better-than-expected upside to earnings in 2014E and 2015E.

3D printing to add a new dimension in 2015. Venture has built the first prototype of an industrial 3D printer for a new customer, one of the world’s largest manufacturers of 3D printers. We are optimistic on the potential for 3D printing, and anticipate the possibility of better revenue emerging from this segment by 2015. Even the Singapore government is investing half a billion dollars into developing this industry, as announced in its Budget 2013.

Free cash flow supportive of full dividend. Our full-year 2013E EPS is SGD0.491, below our forecast dividend of SGD0.50 per share. However, based on our forecast free cash flow, we expect Venture to be able to maintain its dividend payouts in 2013E and 2014E, giving a yield of more than 6.5%. Despite a higher capex, we believe higher free cash flow is achievable due to prudent working capital management and lower tax payments.  

Source: Maybank Kim Eng Research - 7 Jan 2014