Potential component supply disruption. The massive earthquake in Japan has disrupted the operations of many of the manufacturers/suppliers of vital parts and equipment used in computers, electronics and cars. Media reports suggest that many of these plants are closed for days, with restart dates uncertain. Although some of the plants are not too badly damaged, market watchers note that greater problems may emerge if rolling electrical blackouts and transportation disruptions across Japan continue for an extended period of time. As a result, there is a risk that downstream manufacturing companies - including Venture Corp (VMS) - could face component shortages, especially for parts such as LCD (liquid crystal displays), flash memory and certain capacitors.
Sufficient inventory for now. However, our checks with VMS suggest that it still has sufficient inventory on hand to fulfill its current orders. In fact, management adds that the components shortage issue is not new and its customers are well aware of the situation. In the past, these customers have also given VMS the green light to "go out and grab" critical components and it believes that such an approach is likely to continue. On the flip side, such a strategy may result in VMS having to maintain slightly higher-than-usual inventory levels of around four months this year against the usual three months. While working capital is also expected to increase, VMS has ample internal funds (net cash of S$238m as end Dec 10) to deal with the situation.
Also looking for alternatives. In the meantime, VMS is also actively sourcing around for "non Made in Japan replacements" in the event of a longer-than-expected disruption in Japan. While such a move makes sense, we note that some customers may have strict pre-qualification requirements and it may take time to get new components manufacturers/suppliers on board. If it is indeed the case, then we believe 2Q11 could be crunch time for the electronics manufacturing industry. Based on the current shortages in the market, we expect VMS' RSS (retail store solutions) and PC and Data Storage segments to be the most impacted.
Maintain BUY. Still, we believe VMS' strategy to diversify its product portfolio and also move up the value chain (becoming more of a total solutions provider) should help mitigate the components shortage impact. As such, we are leaving our estimates unchanged for now; maintain BUY with S$12.10 fair value (based on 15x FY11F EPS). Key risks include currency fluctuations (exposure to US$) and worse-than-expected components shortage.
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