Friday, August 23, 2019

Jardine Matheson Holdings (SGX: J36) - Valuations Getting Attractive BUT.....

Jardine Matheson Holdings (SGX: J36) has been on a tear this year, dropping by as much as 23% in 2019, mainly due to the intensifying global trade tension, protests in Hongkong and slowing businesses in particular the auto sales, putting the company as one of the worst performer in the STI index.

As a contrarian investor myself, I became interested in the company when the share price keeps falling, which means valuations are getting cheaper in relative to its earnings.

But as an investor with limited resources, is now the best time to put our money into the company?

Company's Background

Founded in 1832, Jardine Matheson Holdings became one of the trading houses that shaped the early days of Hong Kong's development. It moved its stock listing to Singapore thereafter in the early 1990s.

The company is a conglomerate investment holdings company akin to Berkshire Holdings of Warren Buffett, where they held several great businesses that have evolved for the better over time.

The company held these businesses by sectors:

- 100% of Jardine Pacific
- 100% of Jardine Motors
- 84% of Jardine Strategic
- 42% of Hongkong Land
- 65% of Dairy Farm
- 65% of Mandarin Oriental
- 63% of Jardine C&C
- 31% of Astra

Clearly, if you are buying into Jardine Matheson, you are essentially buying into their Astra (particularly automobile) business and also their property division business held through Hongkong Land as these two contributed the most to the earnings.

This followed by their retail business which they held through their 65% stake in Dairy Farm.

The rest of the others was relatively insignificant, for instance their hotel business through 65% stake in Mandarin Oriental and their stake in JLT.

Divestment of Jardine Lloyd Thompson

Earlier this year, the company completed the sale of Jardine Lloyd Thompson (42%) to Marsh & Mclennan for a net proceeds of US$2.1 billion, recognizing a gain of US$1.5 billion on the book in 2019, unlocking the value of their net asset value which ballooned in the Q2.

The sale is valued at about 30x PER of its future earnings contribution.

From this sale, you can see that their underlying earnings drop in Q2 due to the absence of contribution from JLT but cashflow wise was healthy due to the proceeds.

JLT, in my opinion, was also a non-strategic asset which the company did not have heavy involvement or presence in, hence I think it's a good divestment for both parties.

Moving Parts

It's incredibly difficult to analyze an investment holding conglomerate which has many moving parts of its businesses so we'll be just focusing on a few major contributions.

Astra International

The biggest earnings contribution, as mentioned earlier is coming from Astra which accounts for around 27% of the overall company's earnings in 2018. 

Astra, on its own, is a conglomerate company focusing on the primary market in Indonesia, and operates in a few businesses which include automobiles, financial services, equipments, agribusinesses and more.

PT Astra International earnings fell 6% in 1H 2019 as they face higher competitions and lower margins from their automotive and agribusiness divisions.

In it's outlook, management cited it might face some difficult concerning situations for at least until the rest of the year.

Prijono Sugiarto, president director of Astra, said: “The group’s performance in the first half of 2019 was impacted by relatively weak domestic consumption and a downward trend in commodity prices, but benefited from an improved performance from financial services and the contribution from the newly acquired gold mine. The outlook for the rest of the year remains challenging as these conditions may persist.”

Domestic consumption for sales of automobile locally is expected to drop from 1.5m units sold in 2018 to about a range of 1.05m to 1.1m units for 2019. This is almost about a third drop in consumption sales which is a concern.

To counter-combat this drop in sales, they have set up a joint ventures with Gojek to provide cars to the ride-hailing firm, who are also battling with Grab under the same radar.

HK Land

Hongkong Land is their second biggest contributors to the earnings so it is also critical that we look into the property side of the business when analyzing Jardine Matheson.

HK Land's earnings for 1H 2019 fared slightly better as they are up by 2% as compared to the previous year. This is due to the strong positive rental reversion concerning their commercial portfolio which contributed to the steady stable growth of their earnings.

While development sales are lower in Singapore, there will be a good amount of earnings contributions from the sale of their completed China projects in Chongqing in the second half of the year. 

The company has so far injected a massive amount of development projects in Chongqing, as much as 20 projects, so we should see some good fruitions in the next few years to come, as and when they are completed.

Dairy Farm

Dairy Farm's 1H earnings saw a modest increase which is up by 5% year on year for underlying earnings.

The first half of the year saw a strong performance from the Health & Beauty division, Convenience stores and Home Furnishings. While contributions from Yonghui and Robinsons retail are also higher, these are offset by the transformation costs incurred as the Group continued to reshape the business model of the company.

Nevertheless, the Group is expected to see reduction in transformation costs incurred over time and also the fruitions from the reshaping of the business model in years to come.

Final Thoughts

Buying Jardine Matheson is akin to buying an investment model ETF which held many great listed businesses. 

The good thing about buying such a diversified portfolio is their earnings will not be severely impacted by one division which is struggling and you can see this through their steady growth of paying out dividends over the years which has been increasing over time.

However, being diversified also has its downside as one particular struggling division could be a drag to the overall portfolio of the company, which I think might be the case with Jardine Matheson as their biggest contributors Astra is facing some headwinds for this and next year.

In this regard, I think it might be more worthwhile to directly buy the other companies that are listed and have more promising outlook such as HK Land and Dairy Farm, while waiting for the Astra businesses to improve before buying Jardine Matheson.

That said, Jardine Matheson is still a solid company to own and one which I will be monitoring closely too for the upcoming months to come.

As of writing, Jardine Matheson has a trailing PER of 12.4x, dividend yield of 3.2% and P/BV of 0.7x.

Thanks for reading.

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