Why analyst thinks Li & Fung's 1H results may disappoint

Core operating profit pegged at ~206m.

According to Nomura, Li & Fung is to announce its 1H result today. Nomura thinks near-term results may disappoint (1H core operating profit at ~206mn, about 6% lower than consensus 220mn) – mix of around 20:80 between 1H:2H.

Here's more:

Though the company may try to focus on 2H and long-term trends, we think the market may not approve of weak performance, leading the stock to remain range-bound in near term. We will be focusing on key customer adds in distribution, US trends in sourcing and margin ramp-up in LF USA.

The stock is trading at ~14x CY14F P/E, and at certain valuations (another 10% lower), we believe it would look attractive enough to be bought on just the sourcing business alone (we estimate sourcing business forms 70% of FY13F core operating profit).

However, we continue to like Li & Fung’s sourcing business and believe it could grow at around mid-single digits.

On distribution, we think it could take time to improve profitability, but eventually, Li & Fung will either ramp up to make higher-than-sourcing margins in this business, or will get out of distribution if it is unable to do so.