Jardine Matheson: A Cheap Way To Play Asian Growth (OTCMKTS:JARLF)

Old school conglomerates could have fallen out of favor in some developed markets, however Asia nonetheless has its fair proportion of them. One of many better-known ones is Jardine Matheson (OTCPK:JMHLY)(OTCPK:JARLF)(“Jardines”), which has a present market capitalization of round $12 billion.

Jardines has its fingers in plenty of pies. By contribution to 1H 2023 working revenue, its predominant segments are Astra (~50%) and Hongkong Land (27%)(“HKL”)(Fig 1). Astra is itself an extremely various group of operations: automobile and motorcycle gross sales, client finance, heavy tools and mining are a few of its predominant traces. It’s primarily a conglomerate inside a conglomerate. I’ve lined HKL earlier than – it’s a actual property developer and landlord: most of its earnings comes from rental properties, and it owns among the highest high quality actual property in Hong Kong and Singapore. Jardines owns the vast majority of HKL.

Elsewhere, the corporate additionally controls the 5-star Mandarin Oriental resort chain (~3% of H1 underlying revenue) in addition to DFI Retail Group (~3%). DFI operates quite a few retail manufacturers throughout Asia, together with drug shops (e.g. Mannings, Guardian), grocery shops (e.g. Wellcome) and eating places (e.g. Maxim’s).

Revenue Has Recovered…

The above would possibly make Jardines seem very advanced. In a way that’s true, however primarily as a result of it is vitally various. In different methods, it’s truly fairly a targeted enterprise. For instance, geographically it presents targeted publicity to South East Asia and Better China. The mix of those factors makes it an fascinating solution to play regional financial progress.

Jardines’ enterprise is buzzing alongside properly. The corporate was hit pretty onerous by COVID, however earnings have not too long ago recovered past fast pre-pandemic ranges. The corporate posted underlying internet revenue of $823 million in H1, which was round 12% greater than it earned over the identical interval in 2019 (~$738m)(Fig 2). By the way, that is one other good instance of Jardines’ enterprise variety benefitting shareholders, as a result of some segments are nonetheless considerably underperforming their pre-COVID marks. At DFI, for instance, H1 2023 underlying revenue of $26 million was nonetheless round 75% beneath the same-period 2019 determine. Progress in Astra and HKL was greater than sufficient to offset this, and administration expects progress to proceed for the remainder of the yr too.

…But The Share Value Has Fallen

Albeit in a considerably lumpy trend, Jardines has now seen earnings progress rise above 2019 ranges. Moreover, as a result of the corporate has engaged in a major quantity of share repurchases within the interim interval, progress on a per-share foundation is even higher than implied above. 1H 2023 underlying revenue per share ($2.84) was a bit of beneath 45% greater than over the identical interval in 2019 ($1.96 per share). I might additionally add that Jardines has maintained its dividend, which has elevated by round 35% since 2019. It hasn’t minimize its dividend in a few years.

Regardless of that, the share worth right here has completed nothing however fall not too long ago, with the ADSs at present down round 40% from their 2019 highs:

These dynamics – sharply greater earnings; sharply decrease share worth – suggest a really deep minimize to the inventory’s P/E ratio. Certain sufficient, buyers shopping for the 2019 excessive have been paying round 23x underlying EPS. Right this moment, buyers solely must pay 7.5x underlying FY 2022 EPS to personal the inventory. Earnings are nonetheless rising, too. If Jardines makes round $5.80 in FY 2023 EPS, the P/E is extra like 7x.

Dangers And Valuation

So, what may clarify such a pointy valuation de-rate? Firstly, I do not deny that Jardines faces some dangers and uncertainty. HKL, for instance, generates round 30% of its earnings from property growth, which isn’t a fantastic enterprise to be in proper now in China. Moreover, though its rental properties are extraordinarily prime quality, the general market is essentially weak in Hong Kong. Workplace vacancies are excessive, launch spreads are damaging, and that places downward strain on working revenue.

Extra usually, I might even be involved about an financial slowdown, however that is mostly a generic level you possibly can make about any non-defensive inventory/sector. Moreover, lots of the firm’s markets are doing okay. Indonesia’s economic system, as an example, to which Jardines has a good quantity of publicity, is growing at a wholesome clip. Furthermore, it isn’t such as you’re paying a excessive a number of to personal mentioned danger. If earnings fall by half on a 20x P/E, you find yourself at 40x. In the event that they accomplish that from 7x, you solely find yourself at 14x. The inventory worth is already baking plenty of draw back in.

What concerning the stability sheet? Web borrowings quantity to round $6.5 billion (excluding monetary providers), whereas annual retained earnings are at present within the $1 billion area. Debt shouldn’t be an enormous concern right here.

Given all that, my predominant rationalization is that Jardines is solely a sufferer of being neglected. World funding money has been chasing US large tech shares, and that has left pockets of worldwide equities going through contracting valuation multiples. Jardines and lots of of its friends are in that group.

As irritating as which may be for present shareholders, it’s good for patrons. I imply, here’s what the corporate has completed over the previous fifteen years by way of rising EPS (Fig 3), DPS (Fig 4) and internet asset worth per share (“NAV”)(Fig 5). They’ve variously grown at an 8-11% CAGR relying on the metric.

Presently, the inventory trades on a prior-year P/E of round 7.5x, a prior-year dividend yield of 5.4% and for round 0.4x NAV per share. Progress may collapse to zero and these shares may nonetheless ship 10% annualized returns with out a number of enlargement. Earnings must go into structural decline for the present share worth to make any long-term sense. With analysts predicting robust progress within the near-term (Fig 6), danger/reward seems to be skewing closely to the latter. I price Jardine Matheson inventory a Sturdy Purchase.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a significant U.S. alternate. Please pay attention to the dangers related to these shares.