Jardine Matheson - Sell: Expensive Dairy, Empty Rooms and Full Garages

2H Outlook: Grim — Jardine Matheson reported a set of in-line results, with 1H09 core profit at US$389m, down 13% YoY. Mgmt slightly raised its interim DPS by 1 US cent to US$0.25. With mgmt expecting the 2H for most businesses to remain difficult, we maintain our Sell (3H) rating.

We raise our TP 20% to US$24.40 reflecting latest market value of the group’s subsidiaries.
Initiate Coverage on Dairy Farm at Sell (3L) — Our negative view on Dairy Farm is predicated on the basis that from a macro (low regional CPI and retail sales) as well as a micro perspective (lower asset turnover and more competition), the company is now facing a period of subdued growth, and yet the stock is trading close to its all-time high (at 27 x PER).

Mandarin Oriental Hit Hard by Economic Downturn — In light of the dismal level of both business and leisure travel, Mandarin Oriental barely broke even with US$1m core profit, and it experienced a 34% fall in RevPAR during the period. Management believes that it is “too early to declare any green shoots” as July/August so far remain to be a weak period.
Hongkong Land — We recently raised our TP on HKL, which was consolidated into JM’s B/S for the first time, to US$4.70 to account for yield compression.

Other Businesses — HACTL saw its throughput drop 21%, accounting for most of the decline in Jardine Pacific’s contribution. New car markets for Jardine Motors in HK and UK remained weak and the division does not see the end of the tunnel at the current stage.

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Jardine Matheson (JM) - Initiate OW(V): Time to revisit a quality business portfolio

Jardine Matheson has a portfolio of market leading businesses in Asia. Dairy Farm is one of Asia’s largest retailers; HK Land dominates Central, HK; Astra is Indonesia’s largest conglomerate; and Mandarin Oriental an award winning luxury hotelier.

Exceptional track record provides defensive appeal after recent rally. EPS growth has averaged 22% pa and annualised total shareholder returns 27% over the past 10 years. It has been comfortably the best performing conglomerate we cover and we argue its business focus and track record provide defensive qualities after the recent market rally.

Asian retail, HK investment property and commodity focus mean its businesses have decent prospects and little exposure to the weak export sector. Jardine also has the balance sheet and skill set to make opportunistic acquisitions. Despite tough economic conditions, we forecast stable recurring earnings in 2009 and a 14% rebound in 2010, plus strong free cash flow and consistently high returns on invested capital.

We set our USD30.5 target at a 30% discount to our appraised valuation of USD44. We argue the shares should trade at the top of the historical range (2005-08: 30-40% discount) based on the market-leading position of the Group’s key businesses, plus the pick-up in share performance indicators. Our target plus FY09e DPS of USD0.75 implies 26% total return. Initiate at Overweight (V).

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%.