Jardine Matheson Holdings (JM), is rightly proud of its beginnings in China in 1832 when opportunities were plentiful and a single entity undertook many businesses. Fast-forward 200 years to the 21st century and the word “conglomerate” is often met with a valuation discount. JM is probably no exception and is unlikely to escape the conglomerate valuation discount.
Conglomerates own controlling stakes in several smaller companies that operate independently of each other’s business divisions.
A conglomerate discount refers to the tendency of markets to value a diversified group of businesses and assets at less than the sum of its parts. The sum-of-parts valuation is calculated by adding an estimate of the intrinsic value of each subsidiary company in the conglomerate and then subtracting the market capitalisation of the conglomerate. The intrinsic value (sometimes derived using discounted cash flow) helps to determine the underlying value of a company and how much cash it generates.
As of Dec 31, 2023, JM’s net asset value (NAV) was US$100.31 ($136.25); a sum-of-parts valuation by JP Morgan in 2023 placed JM at US$62.11 per share. JP Morgan has a 35% “holding company discount” and a target price of US$41 for JM. Its trading price is hovering around US$34.5 as of July 2 and the stock is trading at a 20-year low relative to its NAV (see Chart).
JM has the additional challenge of owning conglomerates. As at end-June, JM was trading at just 0.4 times P/NAV, and 15 times P/E. Its balance sheet is stable, with a low gearing ratio of 27.6%. On the operating front, the interest coverage ratio as of end-December 2023 was 3.3 times and the conglomerate reported free cash flow (see Table 1).
Owner of conglomerates
JM owns 83% of Jardine C&C (JC&C), 53.3% of Hongkong Land (HKL), 77.5% of Dairy Farm International (DFI) and 78.1% of Mandarin Oriental International M04 (see Flow Chart). These companies are listed on the Singapore Exchange S68 . JC&C owns 50.1% of Astra International listed on the Jakarta Exchange.
JC&C is something of a conglomerate as it owns 26.6% of Truong Hai Group Corporation (Thaco) an infrastructure, property development, agribusiness company; 34.9% of Refrigeration Electrical Engineering Corp (REE), a power which is listed on the Ho Chi Minh Stock Exchange; 10% of Vinamilk, and 25.5% in Siam City Cement.
Astra is also a conglomerate that has various businesses. Its two largest contributors are its HEMCE (heavy equipment, mining, construction and energy division), and automotive, followed by financial services as shown in Table 2.
As a conglomerate whose largest contributors are conglomerates, it is unsurprising that the market sees JM as worthy of a discount.
A closer look at JM’s earnings shows that Astra contributed 44% to its underlying profit of US$1.66 billion, followed by Hongkong Land with 22%, DFI with 7%, JC&C with 6% and Mandarin Oriental International with 4%, as shown in Table 3. These figures are rounded up.
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JM consolidates Astra’s revenues and earnings, and JC&C’s revenues and earnings without Astra separately. Hence, although JM owns less than 50% of Astra given that this is held via its 83% stake in JC&C, in FY2023, it consolidated around 78% of Astra’s underlying net profit, and 78% of JC&C’s underlying net profit without Astra. The ex-Astra businesses include the stakes in Thaco, REE, Siam City Cement and Cycle & Carriage (C&C).
Astra’s slowdown to impact JM
Astra’s main contributions are from HEMCE with 40% in revenue and 37% in net income, and motor vehicles which contribute 40% to revenue and 33.6% to net income.
Geographically, for JM, in terms of underlying net profit, 37% is from China, 56% from Southeast Asia and the rest is from the rest of the world. For 1HFY2024 ending June 30, Hongkong Land has already issued a profit warning for an impairment of up to US$300 million.
In its 1QFY2024 business update, Jardine C&C cautioned that it experienced softer trading conditions in its businesses in Indonesia and Vietnam. Astra “reported a 5% decrease in underlying profit” as car and motorcycle sales were down. Profit from its heavy equipment and mining division was lower due to lower coal prices, which impacted coal profits and heavy equipment sales, the JC&C statement says.
Astra’s decline in the HEMCE and vehicle sectors was offset by better earnings from its financial services division because of a larger loan portfolio, infrastructure and logistics, higher toll revenue, and improved earnings from agribusiness supported by higher sales of crude palm oil.
Thaco’s automotive sales volume in 1QFY2024 was largely flat, as the business continued to be impacted by the challenging economic environment and soft consumer demand in Vietnam. C&C in Singapore was impacted by higher leasing expenses as well as lower profit contributions from the used car operations. C&C Bintang in Malaysia has fully transitioned to an agency model at the start of the year.
Elsewhere, Siam City Cement’s performance saw improved profits that were supported by lower energy costs. The 1QFY2024 performance of Refrigeration Electrical Engineering Corporation will be included in JC&C’s half-year results.
Bloomberg Intelligence (BI) expects JC&C’s earnings growth, which has been powered by Astra in the past three years, to slow this year. “Earnings could slip 9%–10% in 2024 and recover in 2025, in our scenario, with valuation at a discount to peers and its historical average,” BI says.
BI attributes this to Astra’s slower sales after 1QFY2024 where car sales fell 20% y-o-y and motorcycle sales dipped by 8% y-o-y.
According to BI, Astra accounts for 88% of JC&C’s underlying profit, contributing 12% to its y-o-y growth to US$1.02 billion in FY2023 after a 39% y-o-y surge to US$913 million in FY2022. In FY2023, JC&C’s stake in Thaco saw a 57% decline due to rising costs.
JM’s performance is dependent on Astra and Hongkong Land, and both companies are likely to experience headwinds in the current financial year, JP Morgan says.
The JP Morgan report says: “JP Morgan analyst Benny Kurniawan sees the market share loss for Astra in the Indonesian market would be more severe than expected, due to earlier-than-expected entry of BYD. He sees downside risk for its auto distribution & manufacturing margins in the next two years.”
Biggest merit is JM’s dividend
JP Morgan adds that JM’s FY2024FY2025 net profit after tax will likely be impacted by Hong Kong office property. “Hongkong Land is not immune to the over-supply of Hong Kong’s office market, and we believe rental reversion of its Central office portfolio will remain negative for a while.”
“While we have an underweight rating on both Astra and Hongkong Land, comprising 60% of earnings or 50% of NAV combined), we are neutral (downgraded from overweight) on JM at the conglomerate level because we believe JM trades more on dividend which we believe will still see a stable mid-single-digit CAGR in the next three years. In fact, the biggest merit of JM has always been its solid track record in a stable dividend per share growth with a consistent payout ratio,” JP Morgan says.
In FY2023, JM paid out US$2.25 per share, representing a dividend payout ratio of 39% based on its underlying profit. However, in 1HFY2024, with Hongkong Land announcing impairments and facing the likelihood of lower office rentals, coupled with Astra’s slowdown, JM would face challenges maintaining dividends.
JP Morgan is forecasting DPS should remain stable even if EPS growth disappoints. “In our base case, we have forecast a mild 1% y-o-y growth in EPS and DPS for FY2024 followed by 3% y-o-y growth in FY2025 and FY2026. Even if EPS turns negative this year, we believe DPS will at least be kept flat as JM has a solid track record of executing stable DPS growth even at times of EPS decline. We believe JM will adhere to this progressive dividend policy.”
