Li & Fung 1H15 profit slides 19.7% to $182m

Moody's says no ratings impact, however.

Moody's Investors Service says that Li & Fung's weaker 1H 2015 results are credit negative but have no immediate impact on the company's Baa1 issuer and senior unsecured bond ratings or the Baa3 rating on its perpetual securities.
According to a research note from Moody’s Investors Service, the ratings outlook remains stable.

"Li & Fung's overall financial metrics moderately deteriorated because of a considerable decline in profitability in 1H 2015. However, its financial profile remained reasonably solid, although its financial cushion at the current Baa1 issuer rating level has shrunk," says Joe Morrison, a Moody's Vice President and Senior Credit Officer.

Li & Fung reported 1H 2015 core operating profit (COP) of $182 million, a decline of 19.7% from 1H 2014. Consequently, for the 12 months ended 30 June 2015, adjusted debt/EBITDA and EBITDA interest coverage weakened to about 2.9x and 6.4x respectively from 2.7x and 6.6x at year-end 2014. Its debt level remained stable despite sizeable dividend payments, and this stability curbed a further deterioration in these ratios.

Here’s more from Moody’s Investors Service:

The global retail industry, which is the key end-market for Li & Fung, has been facing a difficult environment, with deflationary pricing trends for retail consumer goods, subdued consumer spending in the US, macroeconomic and currency uncertainties in the eurozone, slowing Chinese economic growth, and the disruptive force of ecommerce.

These challenges are having an adverse impact on Li & Fung's key customers and its profit generation, and conditions seem unlikely to improve in the near term.

"If the company's profitability continues to weaken considerably over the next couple of quarters, downward pressure on the ratings could arise, given the limited leeway for further deterioration," adds Morrison.

Moody's expects Li & Fung's adjusted debt/EBITDA ratio to gradually rise to 3.1x-3.2x over the next 12 months, driven by weaker earnings. This level of leverage would position the company at the weak end of the Baa1
issuer rating category.

Li & Fung's liquidity remains strong. Its cash flow from operating activities for the twelve months ended 30 June 2015 was about $617 million, while cash and bank balances and availability under committed bank facilities at 30 June 2015 were about $315 million and $653 million, respectively. These sources were more than sufficient to cover short-term debt of $123 million due in the next 12 months, annual capex of about $100 million, and a dividend in line with the company's historical payout ratio of approximately 60% of core operating profit.