Venture's 2Q12 PATMI of S$33.6m (-19.9% YoY) and sales of S$611.8m (-2.7% YoY) came in below our expectations. The pickup in orders from IBM has not done enough to offset the slowdown of other business segments. Gross margin fell to a two year low of 21.5%, resulting in a decline of earnings. As such, we lower our earnings estimates for FY12 by 12.3% to S$150.8m to account for the weak performance in 1H12. However, with fresh product launches and new customer contributions, we still expect the group to subsequently improve revenue from 2H onwards. Most notably, Oclaro will begin contributions from 4Q12. Maintain BUY with a lower TP of S$8.74, based on 14.8x blended FY12/13 earnings (5-yr historical average forward P/E). We believe that the group will be maintaining its dividend payout of 55.0 S''/share, which works out to an attractive yield of 7.1%.

Weak customer demand. The group experienced an overall decline in revenue with all business segments registering declines except the Retail Store Solutions (RSS) segment. RSS is supported by IBM's strong orders albeit at a poorer margin due to product mix. Notably, Networking & Communications and Computer Peripherals & Data Storage fell by 10.7% and 8.5% YoY respectively as major customers such as Intermec, Hewlett Packard and Hypercom are experiencing slowdowns amid the PC industry slump.

New products and customer to spice 2H up. We are expecting some new products to be launched in 2H, with contributions from Verifone as well as a handheld device OEM, thereby boosting the Networking & Communications segment. Furthermore, we are also expecting manufacturing work for Oclaro to commence in 4Q12 and to eventually ramp up, resulting in Oclaro becoming one of Venture's largest customers. On top of that, the group's strong track record in manufacturing life science measurement instruments will aid in rapidly developing its new medical segment.

Source: OSK