Trading group Li & Fung in store for subdued profits, say analysts
US weather woes, Vietnam factory riots may put chill on earnings growth of global trading group
A chilly start to the year in the United States and disruption from anti-Chinese factory riots in Vietnam are expected to weigh on Li & Fung's results for the first half of the year.
And with the global trading group having completed the spin-off of its brand business in July, analysts believe it may not be able to count on a traditionally stronger second-half performance to make up the ground. The company will announce its results for the six months to June on Thursday.
"The year started with an unfavourable climate in the US … together with the disruption in Vietnam, we anticipate some shipment delays in [the second half]," said Deutsche Bank analyst Anne Ling in a research report, adding that a cold spring in the US also weighed on operating pressures. "For the agency business, the impact is on sales volume, while margins remain stable."
Analysts expect Li & Fung to post modest growth or even a decline in core operating profit.
By this measure, Deutsche Bank estimates an 8 per cent decline, while Sun Hung Kai Financial expects the figure to come in at US$226 million, about 1 per cent above the US$223 million Li & Fung posted a year ago.
The first half has typically contributed about 25 to 40 per cent to Li & Fung's full-year core operating profit.
That figure has never exceeded 50 per cent in the past five years, as the back-to-school and holiday seasons in the US - the company's key export market - drive retail sales in the second half.
However, analysts doubt this trend will play out to the same extent in the second half, given Li & Fung's completion of the spin-off of Global Brands Groups.
They now expect that the "new" Li & Fung will become a "dividend play", with more stable and visible earnings stream, while Global Brands is expected to have higher growth potential.
Nevertheless, stripping out the contribution of Global Brands, starting from the second half, would reduce earnings, as it accounted for 15 per cent of Li & Fung's 2013 core operating profits, a Credit Suisse report said.
A three-year purchase agreement, under which Global Brands must buy at least half of its sourcing from Li & Fung's trading division, may offset some of the sales outflow due to the spin-off, the report said.
The Global Brands spin-off had triggered downgrades for Li & Fung's earnings estimates. Credit Suisse cut its 2014 and 2015 whole-year earnings forecasts by 13 and 14 per cent respectively in July, while Barclays reduced 2014 to 2016 earnings estimates by 7 to 15 per cent.
Company guidance to analysts earlier indicated a margin contraction this year.
"Recent management guidance advised that, as in previous plans, the business was in investment mode earlier on, adding headcount ahead of expected revenue ramp-up from selected accounts. With costs preceding revenue growth, this is leading to a margin squeeze in 2014," said Barclays analyst Vineet Sharma in a report last month.
