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    Brokerages downgrade Largan after Q4 forecast

    LENS CLOUDED: Analysts expect the firm ¡X and its local rivals ¡X to see a reduction in orders now that all major handset makers have lowered their forecasts for next year
    By Kevin Chen
    STAFF REPORTER
    Friday, Nov 28, 2008, Page 11

    Largan Precision Co (¤j¥ß¥ú) saw its equity recommendation downgraded yesterday to ¡§sell¡¨ from ¡§hold¡¨ at Citigroup after it announced on Wednesday a poor forecast for sales for this quarter.

    The nation¡¦s leading maker of camera and handset lenses also saw its stock downgraded to ¡§neutral¡¨ from ¡§buy¡¨ at Goldman Sachs, to ¡§underperform¡¨ at Merrill Lynch, and had its earrings estimates for this year cut by SinoPac Securities Corp (¥ÃÂת÷ÃÒ¨é), the brokerages said in investment notes issued yesterday.

    In a filing to the Taiwan Stock Exchange on Wednesday night, Largan said fourth-quarter revenue would drop between 15 percent and 25 percent from its third-quarter level after weaker-than-expected customer demand for the October-December period.

    At a teleconference on Oct. 21, company chairman Scott Lin (ªLÄ£­^) told investors and analysts that Largan expected a ¡§flat¡¨ performance in revenue for the current quarter compared with the previous quarter¡¦s NT$2.159 billion (US$64.9 million).

    Largan¡¦s revision surprised the market because it had reported record sales of NT$808 million last month.

    However, as all major handset vendors have lowered their forecasts for next year ¡X including Nokia¡¦s revision of its fourth-quarter shipment forecast from 351 million units to 330 million units ¡X and expect weakened shipments industry-wide next year, Citigroup said Largan¡¦s announcement should meet market expectations.

    ¡§Order cuts in Taiwan are a matter of ¡¥when,¡¦ not ¡¥if,¡¦¡¨ Citigroup Global Markets analyst Kevin Chang (±i³Í°¶) wrote in a client note yesterday.

    Indeed, the woes of Largan Precision have partly reflected how severe market concern is. The Taichung-based company¡¦s shares have fallen by half this year and closed at NT$215 yesterday.

    Largen ended 2.27 percent lower in trading yesterday, underperforming a 4.26-percent increase on the benchmark TAIEX.

    Based on its 15 percent to 25 percent downward adjustment announced on Wednesday, Largan is likely to see its revenue fall to between NT$16.19 billion and NT$18.35 billion in the current quarter.

    In line with this revision, Citigroup predicted a monthly decline of 25 percent in Largan¡¦s sales this month and another 50 percent monthly drop next month.

    ¡§As such, Largan¡¦s utilization rate could drop well below 50 percent in December,¡¨ Chang wrote.

    ¡§Given the sharp decline of the utilization rate, we are concerned that Largan could see meaningful margin pressure in the first half of 2009,¡¨ Chang wrote.

    Citigroup lowered its target price for Largan from NT$310 to NT$180.

    SinoPac predicted Largan¡¦s fourth-quarter earnings per share (EPS) would drop to NT$3.84 from NT$9.09 in the third quarter on a lower utilization rate and potentially weak Christmas shopping demand.

    It also trimmed the firm¡¦s earnings for this year to NT$22.58 per share from its previous estimate of NT$25.06, and predicted a 9 percent drop year-on-year in revenue next year to NT$7.42 billion, with the gross margin sliding to 49.8 percent and earnings per share falling to NT$18.3.
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