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Outlook dims for Li & Fung shares

Surprise profit warning prompts sell-off in the stock and analysts to downgrade their ratings

PUBLISHED : Monday, 14 January, 2013, 11:58am
UPDATED : Tuesday, 15 January, 2013, 3:47am

Analysts cut their targets for Li & Fung's share price after the company surprised them with a profit warning.

Hong Kong's biggest distribution and trading company was the biggest loser on the stock exchange yesterday. Its share price dropped 15.4 per cent to HK$11.74, having fallen 16.1 per cent intraday in the heaviest trading in months.

Yesterday's decline was the biggest since August 10 last year.

On Friday, Li & Fung warned that core operating profit for last year would plummet 40 per cent because of restructuring costs and provisions in its US subsidiary, LF USA.

Bank of America Merrill Lynch slashed its target price for Li & Fung shares to HK$10.20 from HK$14.60, downgrading its recommendation on the stock to "sell".

Nomura also lowered its rating on the firm, to "reduce" from neutral, cutting its target price to HK$12.20 from HK$13.60.

Citi cut its target price for Li & Fung to HK$13.90 from HK$15.20; HSBC reduced its target price to HK$16.25 from HK$17.80; Goldman Sachs slashed its target price to HK$13.10 from HK$17; and Barclays Capital chopped its target price to HK$13.50 from HK$16.20.

"Friday's profit alert came as a surprise and is due to worse-than-expected deterioration in the LF USA business and provisions from restructuring to reduce brands at LF USA," a Citi report said. "Market confidence in the company's guidance has been further weakened by the profit alert."

Citi expects LF USA to post a loss for the year, saying the company's performance in the past two months did not meet the guidance Li & Fung gave analysts in November.

Li & Fung would seek acquisitions in beauty products and Asia, Citi said.

The turnaround of LF USA might take longer than expected, and Li & Fung's core operating profit might fall short of its three-year target of US$1.5 billion, a Nomura report said.

The discontinuation of the US brands would cut hundreds of millions of US dollars from Li & Fung's revenue while incurring US$200 million of costs, it said.

But an HSBC report said Li & Fung's profit warning was not as bad as it seemed. "Our bullish investment case whereby Li & Fung is set for a strong earnings rebound in 2013 remains despite this profit warning," it said.

Nonetheless, the bank cut its earnings forecasts for Li & Fung for last year and this year.

According to British media reports, Li & Fung agreed to pay £250 million (HK$3.13 billion) for Lornamead, a personal care products firm. Li & Fung was unable to confirm this acquisition.

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