HP Split won’t weigh suppliers like Venture Corp.

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WHEN two elephants fight, it’s the grass that gets trampled is an old Asian proverb. But what happens when a large corporate elephant splits into two? Well, we investors in Asia are about to find out.

On October 6, 2014 one of Silicon Valley’s original companies Hewlett Packard announced that it was separating into two separate entities — Hewlett Packard Enterprise, a datacenter-focused business that includes enterprise hardware, services and software, and HP Inc. which will combine the firm’s PC and printers division. It will split the company which has US$ 100 billion a year in revenues right down the middle into two firms with roughly US$ 50 billion annual revenues each.

HP was one of the earliest electronics firms to invest in Singapore and in Asia. In 1970, it opened a small plant to help assemble core memories for HP 211X computers in Singapore. By mid 1980s, HP which was then making some of its printers and other components in Singapore was one of Singapore’s largest manufacturing employers. When HP aggressively began contracting out parts of its manufacturing in the 1990s, it spawned an even bigger ecosystem of suppliers in Singapore and across the region, many of them owned or run by former HP engineers and executives.

Of the many Singapore firms with links to HP the most prominent is Venture Corporation Ltd.  a contract manufacturer founded by former HP executives including its current CEO Wong Ngit Liong. Among other things Venture makes printers for HP.

While historically, printers and related components made a substantial part of Venture’s revenues, their share has been declining in recent years. Venture’s printer and imaging division which counts HP as its main customer made up just 12% of its total revenues in the first six months of the year compared to over 40% of its revenues in 2009.

These days bulk of Venture’s revenues come from its test and measurements unit which makes up nearly a third of its sales. Ironically, its main customers in the tests and measurements unit is Agilent Technologies which was a spinoff from Hewlett Packard in 1999. Agilent itself is now in the process of splitting into two separate companies —Agilent Technologies and Keysight Technologies. Venture will continue to contract manufacturer for both Agilent and Keysight.

“Over the last few years, we have seen demand for Venture's products impacted by consolidation activities among several of its customers, (like) Intermec (customer) being acquired by Honeywell, Hypercom being acquired by Verifone, Radiant Systems being acquired by NCR and IBM POS being acquired by Toshiba,” Patrick Yau, analyst for Citigroup noted  in a report recently.

“While these (mergers) impacted Venture's business volumes in 2012/2013, we believe the impact from these M&A activities has been winding down as these transactions mature,” he wrote.

Yau sees some risk for Venture as HP digests its split into two. Citigroup has a “Buy” on Venture on several tailwinds — impact from customers’ M&A action tapering, growth in areas such as life science and 3D printing and US dollar revenue stream which positions the company well in a stronger US dollar and rising rates environment.

 Venture, says Yau, “ has an unlevered balance sheet driven by its strong cash generation and presents investors with a sustainable, attractive dividend yield” of 7.2%.  Citi has S$ 8.60 target price or 14% return.