Jardine Matheson Group - 2Q results review: Tough times to continue; we see value in JCNC & JS

JM/JS results: Underlying profits at JM/JS were down 10%/9% respectively. Management comments were that the more challenging conditions of the 1st half are expected to continue and be reflected in full year results. Management maintained a 38c interim dividend. Current JPM/consensus estimates project 5-7% y/y growth in profits for JM and 7-10% growth at JS. Extrapolating management comments to mean a 10% decline could imply a 15% or so downside to estimates on the two stocks. But with the stocks down 14-15% over the last six months (vs -7% for the STI & +0.5% for the HSI, both in US$), some of this is in the price, in our view.

JCNC’s results: Since the end of April JCNC has underperformed Astra substantially. This has not abated since the rights issue. Since the rights closed 9 th July, JCNC is down 5.9% (in US$) vs Astra’s -0.5%. Results suggest that this is unwarranted. JCNC’s non-Astra earnings grew by 68% y/y in 1H FY15 to $69m. Strong vehicle sales in Vietnam, Singapore and Malaysia also contributed, along with the acquisition of a 25% stake in SCCC in 2Q. Non-Astra earnings were 20% of JCNC’s 1H underlying PAT. Over time this should drive greater stock price decoupling from Astra. JCNC is trading at a five-year low, at less than a 10x P/E, with potentially a 4% yield. We see it as mispriced, but the lack of catalysts is a risk to our PT. 

 ■ Waiting for the major subsidiaries to turn: Given the performance of the major subsidiaries ASII, DFI and HKL, we see the group results as slightly better than expected. Unlisted Jardine Pacific and JCNC’s exAstra businesses both posted strong results. However, evidence of a turn in fortunes at DFI and Astra is probably critical to a sustained appreciation of the parents.

Jardine Matheson Technical Analysis
Daily Chart
Relative value favors JS over JM: The extended underperformance of JS vs JM, and extreme valuation vs history on a discount to NAV, leads us to prefer JS over JM within the group. We see incipient signs of the performance reversal. Over the last month, JS has outperformed JM by about 4%, and we see the potential for a further 5-10% relative outperformance going forward. We see JS as attractive on valuations in absolute terms too and reiterate our OW rating with a US$36 Jun-16 PT, while we have a Neutral rating on JM with a US$55 PT. (Read Report) 

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Source : JP Morgan Asia Pacific Equity Research

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