Rocket Falls After Fashion Group Writedown Hurts Profits

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  • Stock falls as much as 12 percent, most in four months
  • Jefferies says valuation methodology is ‘overconfident’

Rocket Internet SE shares fell the most in more than four months after a writedown of e-retailer Global Fashion Group contributed to a first-half loss of 617 million euros ($690 million) at the German startup factory.

Shares of Rocket lost as much as 12 percent before recovering somewhat to a 9 percent drop to 17.16 euros at 11:49 a.m. in Frankfurt. Global Fashion Group, a collection of apparel e-commerce sites in Asia, Africa, South America and Australia, dragged down first-half earnings by 383 million euros, Berlin-based Rocket said in a statement late Thursday.

Overall, Rocket lost 617 million euros in the first half, on 29 million euros in sales, down from 71 million euros a year earlier.

"With weak business momentum, opaque funding structures, no sign of fundamental improvements in core businesses and the rising risk of funding down-rounds in portfolio companies, we remain sellers of Rocket Internet," said Neil Campling, head of tech, media and telecom research at Northern Trust Securities in London.

Rocket, headed by German entrepreneurial whiz Oliver Samwer and taken public two years ago, has seen its share price tumble nearly 30 percent over the past year as investors lose patience with a slow pipeline to take companies it owns public and a recent so-called down round that cut the valuation of holdings as new funding comes in. Campling said he expected "significant downward pressure" on Rocket’s portfolio value. That could pose risk to other companies Rocket’s trying to take public in order to create value for shareholders.

Rocket plans to report full first-half results on Sept. 22.

The impairments at Global Fashion Group and other investments validate the concerns of some investors over how Rocket Internet values its assets. The profit warning shows the financial impact of the company’s “overconfident” valuation methodology for its holdings, Jefferies said in note to clients.

"The market hasn’t been too kind to Rocket since its IPO," Jefferies analyst James Lockyer wrote. Rocket made "no mention of one of its selected portfolio companies going public," he said, "one of the other previous goals it had set out."

CEO Samwer said the company still expects "at least three of our selected portfolio companies to turn profitable by the end of 2017" and that their adjusted losses reached a trough last year. Chief Financial Officer Peter Kimpel added in a conference call with reporters Friday that nothing Rocket reported was outside market expectations.

Results were also affected by special items such as impairments, fair-value adjustments and to a "lesser extent" positive special items, the company said.

The company in July contributed 68 million euros to a 330 million euro funding round for Global Fashion Group, completing a deal first announced in April. The financing valued the online fashion retailer at 1 billion euros, less than half what it was worth last year. Rocket’s 20 percent stake in Global Fashion Group went from 680 million euros to 180 million euros.