Reuters: Global Markets: Li & Fung slumps as weak earnings prompt downgrades

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Li & Fung slumps as weak earnings prompt downgrades Aug 10th 2012, 02:37 HONG KONG | Thu Aug 9, 2012 10:37pm EDT HONG KONG (Reuters) - Shares of global supply chain manager Li & Fung Ltd (0494.HK) slumped by more than a fifth on Friday after disappointing operating profit triggered a series of downgrades by brokers concerned about the impact of sluggish demand from the United States, Europe and China. A global economic slowdown has weighed on consumer-related companies and Hong Kong-based Li & Fung, which manages supply chains for major retailers such as Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N), warned at an earnings briefing late on Thursday that the euro zone remained weak. "The results totally missed forecasts, with margins shrinking and not much top-line growth," said William Lo, analyst at Ample Capital. "Its valuation is expensive and it's probably better to wait for the stock to come down about 30 percent before considering whether to jump in." Li & Fung said on Thursday that half-year core operating profit fell 22 percent due to a slower-than-expected turnaround of its U.S. operations and weak demand in Europe, though January-June net profit rose by a third as it booked write-backs on two 2010 acquisitions. The write-backs came after some of its acquisitions failed to generate as much income as expected. Li & Fung puts a down payment on part of the consideration when it buys a company and the remainder of the price is subject to earnings reaching a certain level. As 60 percent of Li & Fung's sales are to U.S.-based retailers, investors are increasingly concerned about the impact of sluggish U.S. growth and a raft of data that has pointed to weak consumer spending. Li & Fung shares fell as much as 22 percent on Friday to their lowest since last October and the biggest drop since the company listed in 1992. The stock was down 21 percent at HK12.68 at 0230 GMT, lagging a 0.3 percent dip on the benchmark Hang Seng Index .HSI. REVISED DOWN Goldman Sachs was among the brokers to downgrade Li & Fung, cutting it to 'neutral' from 'buy'. Bank of America Merrill Lynch lowered its target price on the stock to HK$17 from HK$18.60 and retained a 'neutral' rating. "Given the tough macro environment, management believes it is difficult to meet its 3-year plan in 2013, but it is still confident of achieving a decent growth in core operating profit," Bank of America Merrill Lynch said in a client note. Morgan Stanley cut its Li & Fung price target to HK$19 from HK$20.5, while Barclays revised down its price target to HK$16.2 from HK$23.3, and downgraded the stock to 'equal weight' from 'overweight'. "We're not too sanguine on a recovery in the second half. The only positive catalyst we expect between now and March 2013 is the possible announcement of acquisitions done at attractive valuations," Barclays said. "It also seems increasingly likely that the company will not only miss its current three-year target of core operating profit of US$1.5 billion, but perhaps do so by a wide margin." (Reporting by Donny Kwok; Editing by Anne Marie Roantree and Ian Geoghegan) Link this Share this Digg this Email Reprints

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