Jardine Strategic - Hold: Expensive Dairy, Empty Rooms and Full Garages

2H Outlook: Grim — Jardine Strategic reported a set of in-line results, with 1H09 core profit at US$418m, down 10% YoY. Management slightly raised its interim DPS by US$0.001 to US$0.060. With management expecting the 2H on most businesses to remain difficult, we maintain our Hold (2M) rating. We raise our TP 19% to US$19.50 to reflect latest market value of 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 Strategic - Hold: Clearly Surviving But Not Thriving

Cutting estimates and target price — Jardine Strategic (JS) reported 2008 underlying net profit up 19% yoy at US$859m, 7% above our estimate but 5% below the Street. Compared to the 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 5%-10% and reduce our target price from HK$12 to HK$10 (still apply a 40% discount to NAV). We move our rating to 2M (from 2L), 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 JS’s headline earnings (-66% yoy) and book value (- 36% yoy) were hit by negative revaluation of investment property. The revaluation 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 that 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.