How Risky Is The High-Yielding Venture Corporation Ltd As An Investment?

Credit: Ethan Lofton

Electronics manufacturing services provider Venture Corporation Ltd (SGX: V03) is a company that could attract income investors right now with its high dividend yield.

To the point, at its current share price of S$8.39, Venture Corp has a yield of 6.0% thanks to its annual dividend of S$0.05 per share in 2015. For perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI) – has a yield of ‘just’ 3.6%.

But, when it comes to investing, it’s not just the potential rewards that matter – the risks are worth considering too. So while Venture Corp has a high yield, investors might also want to think about its downsides.

When it comes to a stock’s risk, there are many areas to look at, but let’s focus on just two here.

Balance sheet risk

A company can be made fragile by the presence of high levels of debt on its balance sheet.

When a company has been borrowing money wantonly, it could run into trouble with servicing or repaying its loans at some stage. In such events, the company’s shareholders could face painful outcomes such as dilution, an elimination of dividends, involuntary sales of assets, and in the worst-case scenario, bankruptcy.

Walter Schloss, an investor with a phenomenal long-term track record, once said, “I like to look at the balance sheet and I don’t like debt because it can really get a company into trouble.”

On the other hand, a strong balance sheet – one that has plenty of cash and little debt – can help a company tide over tough times and even be a source of opportunity for a company when its financially weaker competitors have to batten down the hatches to survive stormy weather.

For Venture Corp, its balance sheet looks to be in great shape in my view. The company currently has S$459 million in cash and just S$135 million in total debt.

Customer concentration risk

It can be dangerous for a company to have just a handful of customers. Just think of what can happen to its business if one customer collapses or simply decides to walk away? A high level of customer centration has killed companies before and the sapphire glass manufacturer GT Advanced Technologies is a great example.

The company was listed in the U.S. stock market and had to file for bankruptcy in late 2014 when its product failed to meet the requirements of its customer, Apple Inc. At that time, Apple was likely to be responsible for the lion’s share of GT Advanced Technologies’ revenue.

There may be some worries here with Venture Corp. In its latest 2015 annual report, the company revealed that there was one customer which made up “more than 10%” of its total revenue of S$2.656 billion in that year.

“More than 10%” is a little vague, but it’s not the precise number I’m concerned with here. What’s more important to know is that Venture Corp has a big customer and that’s a risk to note.

That said, the company need not necessarily be in danger in the future. The situation has been going on since at least 2013 (there was also one customer that accounted for over 10% of Venture Corp’s total revenue in each year in both 2014 and 2013) but the company has still managed to grow its revenue in 2014 and 2015.

A Fool’s take

In summary, Venture Corp is a company with a low level of balance sheet risk but high (and possibly very high) customer concentration risk.

But on the earlier question on just how risky is the high-yielding Venture Corp as an investment, there’s still insufficient information in here to be able to reach a conclusive answer. While a study of the company’s balance sheet and customer concentration profile is important, there are other key aspects of the company’s business fundamentals to consider, as I had mentioned.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Apple.