Li & Fung

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UBS Investment Research Key Call: Li & Fung
The US$2.8b question
How much additional funding does L&F need? Management repeatedly highlighted that L&F will make more acquisitions if organic growth remains weak. We conduct an analysis to assess additional M&A funding required in order to make consensus EBIT estimate for 2013 (US$914m). If organic earnings growth reaches 30% YoY (which could be a stretch goal) in 2013, the company will need US$2.8b for more acquisitions that generate 4.8% EBIT margin (same as Lornamead) to meet 2013 EBIT consensus. L&F's bootstrapping model has come to an end We believe the bootstrapping model (obtaining funding at high valuation while acquiring companies at lower valuation) has come to an end because L&F might have permanently lost its M&A currency – high valuation. Since the market will unlikely support L&F with new funding of US$2.8b (under a 30% YoY organic earnings growth scenario), we anticipate L&F to slow down its acquisition process. Lornamead – Low earnings, mild sales growth, and a very high valuation L&F announced acquisition of Lornamead at US$190m. The transaction excluded cash on balance sheet and certain operations. We believe Lornamead's mild organic sales growth does not justify a high acquisition multiple. Lornamead merely generated US$6.4m in pre-tax profit in FY12, implying a trailing PE of >29.9x. Valuation – More capital needs in near term; Sell rating reiterated We reiterate our Sell rating and maintain our DCF-based PT of HK$7.50 as we anticipate L&F to raise capital again in near term. We see material downside to 2013E-15E earnings if the company fails to raise more capital.

Global Equity Research
Hong Kong Industrial Services 12-month rating 12m price target Price RIC: 0494.HK BBG: 494 HK

Sell
Unchanged
HK$7.50/US$0.97 Unchanged HK$11.88/US$1.53

22 January 2013
Trading data (local/US$) 52-wk range Market cap. Shares o/s Free float Avg. daily volume ('000) Avg. daily value (m) Balance sheet data 12/12E Shareholders' equity P/BV (UBS) Net Cash (debt) Forecast returns Forecast price appreciation Forecast dividend yield Forecast stock return Market return assumption Forecast excess return EPS (UBS, US$) 12/12E H1 H2E 12/12E 12/13E UBS 0.01 0.02 0.04 0.08 Cons. 0.08 0.08 12/11 Actual 0.02 0.05 -36.9% 3.4% -33.5% 5.6% -39.1% US$4.67bn 2.7x (US$3.68bn) HK$19.86-11.62/US$2.56-1.50 HK$96.2bn/US$12.4bn 8,096m (ORD) 62% 26,780 HK$337.9

Highlights (US$m) Revenues EBIT (UBS) Net Income (UBS) EPS (UBS, US$) Net DPS (UBS, US$) Profitability & Valuation EBIT margin % ROIC (EBIT) % EV/EBITDA (core) x PE (UBS) x Net dividend yield %

12/10 15,912 679 548 0.07 0.06 5-yr hist av. 3.6 17.7 10.3 32.4 2.7

12/11 20,030 815 617 0.08 0.07 12/11 4.1 13.6 19.3 29.1 3.1

12/12E 21,574 455 296 0.04 0.03 12/12E 2.1 6.0 24.9 42.9 1.6

12/13E 23,323 865 628 0.08 0.05 12/13E 3.7 9.7 15.5 20.4 3.4

12/14E 25,331 956 696 0.08 0.06 12/14E 3.8 9.4 14.5 18.4 3.8

Performance (HK$)
30.0 25.0 20.0 15.0 10.0 5.0 0.0 Stock Price (HK$) Rel. Hang Seng 160 140 120 100 80 60 40 20 0

01 0 /1

04 0 /1

07 0 /1

10 0 /1

01 1 /1

04 1 /1

07 1 /1

10 1 /1

01 2 /1

04 2 /1

07 2 /1

10 2 /1

Price Target (HK$) (LHS) Rel. Hang Seng (RHS)

Stock Price (HK$) (LHS)

Source: UBS

Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$11.88 on 21 Jan 2013 23:36 GMT

www.ubs.com/investmentresearch

Spencer Leung
Analyst spencer.leung@ubs.com +852-2971 7459

Siguo Chen
Associate Analyst siguo.chen@ubs.com +852-2971 8506

Erica Poon Werkun, CFA
Analyst erica-poon.werkun@ubs.com +852-2971 8605

This report has been prepared by UBS Securities Asia Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 6. UBS does and seeks to do business with companies...
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