A dividend yield of 6.2%? Yummy. A market capitalization of approximately S$2.2 billion? Seems like a rather large and “safe” company by equity value.
Seems like it’s worth a second look, or not.
Venture Corporation Ltd (SGX: V03) is a leading global provider of technology services, products and solutions. Its principal activities are manufacturing, product design & development, engineering & supply-chain management services.
As at 19 Feb 2015, the Group’s market capitalization stood at around S$2.2 billion, generating revenue of more than S$2 billion per year.
The Group operates as a provider of manufacturing, engineering, design and fulfillment services to the electronics industry. Some of its key products include Point-of-Sales (POS) terminals, industrial handheld terminals, automotive diagnostics stations, ruggedized computing devices and kiosk units.
It’s 3 main key drivers of revenue are:
- Electronics Services Provider (65% of total revenue)
- Retail Store Solutions and Industrial (31% of total revenue)
- Component Technology (4% of total revenue)
All of which are driven by 5 major components..
Venture Corp operates in a highly competitive environment and has seen revenue sliding. Since FY2007, total revenue of the Group has declined from S$3.87 billion to S$2.2 billion in FY2013. Printing & Imaging, Networking & Communications and Retail Store Solutions & Industrial had caused the decline in FY2013’s revenue.
Moreover, Venture Corp’s profitability was affected with net profit margin decreased from 7% in FY2010 to 5.6% in FY2013. Return on Equity (ROE) also declined from 10% to 7.2% over the same period. That said, the Group has been able to continuously generate free cash flow over the past decade with its steady stream of operating cash flow and relatively low capital expenditure to run its business.
With declining profits over the past few years, is the dividend payout sustainable?
Since FY2007, Venture Corp has been consistently paid out a S$0.50/share dividend annually, which roughly equates close to an 87% payout ratio. However, from FY2012 onwards, Venture Corp’s cash flow statement indicated that it has paid out more cash dividends than its operating cash flow. In view of the highly competitive industry, a potential cut in dividend payment could lead to a revaluation of its stock price.
Value in Action
Venture Corp’s dividend yield seemed rather attractive initially but it does warrant a deeper look into the company to ascertain whether the quality of its dividend payout ratio can be sustained amidst falling revenue and profit margins
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie doesn’t own shares in any companies mentioned above.