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
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