As the global economy trundles on with its sustained recovery, Jardine Matheson Holdings J36 (JMH) stands out as a potential winner among recovery plays in 2024.
JMH is a Hong Kong-based conglomerate with diverse businesses in retail, hospitality, engineering and automotive sectors across Asia.
Established as a trading company in 1832, the firm boasts a storied history encompassing its controversial role in the opium trade and resilience before and after World War II. In 1961, it achieved a listing on the Hong Kong Stock Exchange, with its IPO oversubscribed by 56 times.
Having redomiciled to Bermuda and officially incorporated its current entity in 1984, JMH secured a primary listing on the London Stock Exchange and secondary listings on the Singapore Exchange S68 and Bermuda Stock Exchange. This move involved a delisting from Hong Kong.
Throughout its almost two-century operations, the company introduced several firsts, including opening Hong Kong’s first five-star hotel and establishing the first merchant bank in Asia.
Notwithstanding its robust history, JMH’s stock has recently underperformed, ending FY2023 ended December 2023 17.6% lower at US$41.21 ($55.27) from US$50.06 despite posting results demonstrating recovery for most of its businesses.
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In 1HFY2023 ended June 2023, JMH reported earnings of US$566 million, 34% higher than the earnings of US$423 million the year before. If not for the loss of US$257 million under non-trading items, underlying earnings would have been US$823 million, 10% higher y-o-y.
The non-trading loss was due to a net fair value loss of US$482 million upon the revaluation of investment properties during the period, although this was offset by the increase of US$54 million in the fair value of the group’s other investments.
Following the release of the results, analysts at Macquarie Research, Citi Research and CLSA have “outperform” and “buy” calls on the stock with target prices of US$53.70, US$44.75 and US$56 respectively. The stock closed at US$40.30 on Jan 31, with a P/E multiple of 23.52 times. As at June 30, JMH had a net asset value of US$100.10.
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Astra’s outperformance
While JMH did not disclose its earnings for 3QFY2023, the company announced that its business was “marginally above” the same period in the preceding year. This was on the back of strong growth from Astra International, DFI Retail Group D01 and Mandarin Oriental but partially offset by lower contributions from Jardine Pacific and Hongkong Land.
JMH invested in Astra just after the 1997 Asian Financial Crisis. The Indonesia Stock Exchange-listed company is Southeast Asia’s largest independent automotive group. Operating predominantly in Indonesia, the company is a provider of a full range of automobile and motorcycle products, which is possible via partnerships with the likes of Toyota, Daihatsu, Isuzu, Honda and BMW.
Astra posted 20% higher y-o-y net income in 1HFY2023 at US$1.15 billion, excluding fair value adjustments. This earnings growth reflects improved performances from most of its business divisions, especially its automotive, financial services, and heavy equipment and mining businesses.
In 3QFY2023, Astra reported a 12% increase in underlying earnings, with solid growth from the automotive division which saw higher car and motorcycle sales as well as increased market share. Its financial division, on the other hand, benefited from the growth in automotive sales and higher lending volumes.
The profit from Astra’s heavy equipment and mining divisions during the quarter was flat. This was mainly due to lower coal selling prices, despite improved performances from its heavy equipment and mining contracting operations. Additionally, Astra’s agribusiness division was adversely impacted by lower crude palm oil prices.
Astra’s future growth will pivot on its position in the battery electric vehicle (BEV) market, say Bloomberg Intelligence analysts Lisa Lee and Fairuz Khalil. The company stands to gain from upcoming BEV launches and the expansion of Indonesia’s EV infrastructure.
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Aldiracita Sekuritas analyst Agus Pramono agrees, pointing out that the Indonesian government’s new regulation exempting import duties and luxury tax on built-up and knocked-down EVs should help pave the way for such vehicles in Indonesia. However, it may take at least two to three years before Indonesian consumers fully accept new EV technology and brands. As such, the impact of EV incentives will be gradual, allowing Astra to adjust its business strategy.
Growing domestic consumption and tourism
Meanwhile, JMH’s retail subsidiary DFI’s underlying profits in 3QFY2023 grew by over 80% compared to 3QFY2022, with strong profit growth in the health and beauty as well as convenience divisions, which more than offset lower results in grocery retail and Ikea.
DFI is one of RHB Bank Singapore’s top picks for retail and food products sectors. Analyst Alfie Yeo likes DFI earnings recovery at a compelling valuation. He anticipates a recovery in FY2024, driven by sturdy domestic consumption and a pick-up in tourism in Hong Kong aside from continued economic recovery in Asean and China. The stock also presents an attractive dividend yield due to JMH’s practice of uplifting dividends back to the group level, Yeo highlights.
Although JMH did not release Mandarin Oriental’s underlying profits, it attributes the hospitality operator’s stronger performance to higher fee income in its management business and improved earnings from its owned hotels — particularly in Hong Kong and Tokyo. The company now operates 38 hotels and 11 residences in 25 countries and territories.
Aside from reopening its hotel in Singapore following extensive renovation, the company had also recently signed an option to sell its interests in Mandarin Oriental Paris to SLH Hotels for EUR205 million ($297 million). The sale proceeds will go towards its general development strategy, Mandarin Oriental announced on Dec 22, 2023.
When it comes to JMH’s property business, the performance of Hongkong Land has been dismal. The company recorded lower underlying profit in its 3QFY2023 compared to the previous corresponding period.
Although Hongkong Land saw higher contributions from its luxury retail portfolio and Singapore office business, it posted lower contributions from development properties, which reflected a combination of fewer planned sales completions and slower sales in mainland China.
Due to persistently weak market sentiment for China’s residential properties and an overall decrease in planned sales completions for 2023, JMH expects Hongkong Land’s full-year underlying profits to be “moderately below” the figures recorded in 2022.
In their Jan 4 note, Morgan Stanley Research analysts Praveen Choudhary and Jeffrey Mak downgraded their call on Hongkong Land to “equal weight” from “overweight” previously amid a weak Hong Kong office outlook. Even though Hongkong Land has higher occupancy compared to its peers, the analysts expect rents in the Hong Kong office market to drop 5% in 2024.
JMH continues to face challenges from the global economic environment and the softening of commodity prices. Despite this, it remains confident in the economic resilience of its markets, adding that it is well-positioned to benefit from the ongoing recovery.
JMH has been actively buying back its own shares. The most recent was on Jan 31 when it acquired 6,400 shares at US$40.30 each.
