Jardine Matheson - Sell: Clearly Surviving But Not Thriving

Cutting estimates and target price — Jardine Matheson (JM) reported 2008 underlying net profit up 14% yoy at US$822m, 5% above our estimate but 15% below the Street. Compared to 40% growth seen in 1H08, the ravages of the downturn are obvious in Mandarin, Jardine Motors and HK Land. We lower our 2009-2010 estimates by 10-14% and reduce our target price, in line with our latest NAV, to HK$14.40 (from HK$18.50). We move our rating to 3H (from 3L), in line with our quant based risk system.

IFRS leads to ugly headline numbers — In what we believe will be a sign of things to come, both Jardines’ headline earnings (-64% yoy) and book value (-36% yoy) were hit by negative revaluation of investment property. Therevaluation at HK Land fell 13% from June 2008, but is down just 4% from the December 2007 level. Marked to market accounting is likely to hit this sector more significantly throughout 2009.

Stable balance sheet but no catalysts — With gearing across the group ranging from 1%-19%, debt is not an issue. In addition, almost all businesses increased DPS in line with EPS in 2008. However, with a lack of catalysts and falling earnings due to lower CPO prices, property rentals, hotel rates and other cyclical businesses, we struggle to see a more optimistic scenario at this point.

Buybacks to continue — With plenty of cash from the increased dividends, we expect modest group buybacks to continue in 2009. Management has indicated it will acquire the usual additional 1% in HKL over 2009, which could lead to the group consolidating HKL in 2009, and would lead to a total overhaul of the balance sheet. Consolidated gearing will soon have to incorporate HKL’s debt position and the gearing ratio could rise from 4% to 16%.

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