Barclays cuts estimates for 2014-2016 earnings of Li & Fung

Partly due to unveiled Three Year Plan.

Barclays has announced that it has cut overall Li & Fung’s Core Operating Profit (COP) estimates for 2014-16 by 7-15% due to company guidance on margin contraction this year (versus our initial assumption of an increase) and also a more conservative interpretation of the Three Year Plan that was unveiled in March 2014.

According to a research note from Barclays, there were two differing comments made by management in March 2014 on the performance of the core Sourcing business in the current Plan. One comment, the report said, was that the Sourcing business would account for a higher COP than the entire Group as of 2013.

The other said the Sourcing business would deliver high single-digit top-line growth and low double-digit COP growth over the Plan period (2013-16).

Barclays further noted that it previously leaned toward the latter in our forecasts for the three-year period, working with about 10% growth in COP (at the low end of the company guidance) for the Trading business, from US$539m in 2013 to US$730m in 2016E.

Here's more from Barclays:

However, restructuring of the Sourcing business and moving a chunk of it from the Distribution division to the Trading division meant that the company re-stated 2013 COP
was US$703m.

For this number to exceed the US$871m COP that the entire Group delivered (as per the alternate Plan target statement) implies a growth rate of around 7.5% rather than the 10% we previously incorporated in our numbers.

As such, we now revise down our COP forecasts for 2014E by -15% to US$860m, 2015E by -10% to US$1,030m, and 2016E by -7% to US$1,210m.