To Hedge Against Inflation, Buy Li & Fung: Analyst
In a rising inflationary environment, one stock to own is global supply chain manager Li & Fung, Vineet Sharma, Head of Consumer, Asia ex-Japan Equity Research at Barclays Capital told CNBC.
"Benign inflation in the five- to 10-percent range is positive for the company, because in an inflationary environment, you make some extra cents for doing the same amount of work," said Sharma.
"If you're sourcing, say, a $100 worth of goods...if you have factory inflation running at, say, 10 percent, which is roughly where it is right now, your order swells from $100 to $110. If you can manage to hold on to your commission rates, which we think this company can … then you pick up another 10 percent on your commission rates," he explained.
Li & Fung is the biggest supplier to retailers Wal-Mart and GAP in the United States, and to British department-store group Debenhams.
According to Sharma, rising inflation also presents expansion opportunities for Hong Kong-listed firm.
“In an inflationary environment, particularly like this one, it's a lot tougher for the retailers to do the sourcing themselves,” he said.
Sourcing has also become a more complicated process, he added, with many supply chains moving away from Southern China towards places like Bangladesh, Vietnam and Indonesia.
“Therefore you need more, rather than less, sourcing expertise, which is where Li & Fung comes in,” Sharma said.
Barclays Capital recently upgraded Li & Fung to "1-Overweight" from "2-Equal weight", with a 12-month price target of HK$50. That represents an upside of around 30 percent from current levels.
The stock, it noted, has fallen to a 16 percent discount to its historical average five-year forward price-to-earnings ratio of 28.5 times, making it attractive.
According to analysts polled by Thomson Reuters, 7 have a buy call on Li & Fung, while 5 have an outperform.
Sharma is upbeat on the growth outlook of Li & Fung, and expects the firm to achieve its three-year plan of more than double its operating profit.
"This is a good business model to own if you want to play the return of inflation in the supply chain,' he said.
Disclosure: Vineet Sharma does not have any personal holdings in Li & Fung. Barclays Bank and/or an affiliate has holdings in the company.