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Jardine Matheson (SGX:J36) increases underlying profits in 1H22: should you buy?

SG, Stocks

Written by:

Bryan Tan

We don’t often see stocks like Jardine Matheson mentioned in the news as their businesses are not the most high-tech or “hyped”. In all honestly, this would probably also be the last counter on the average trader’s mind as it is most unlikely that this stock would see any insane intraday rally. That said, Jardine Matheson has long been a favorite amongst dividend investors due to their almost reliable and consistent dividend payout over the years.

Of late, Jardine Matheson Holdings (SGX:J36) is now seeing renewed interest from both retail and institutional investors alike as they recently reported stellar earnings for the first half of 2022. It is indeed safe to say that the worst could possibly be behind them as from reported losses of $117 million back in 1H2021 they have now swung back into the green with a profit of $423 million.

This article will cover Jardine Matheson’s 1H2022 results along with some of my thoughts on the performance of their various business units moving forward.

From Losses to Gains

One of the greatest highlights for Jardine this earnings season is how they managed to come back from a -$117 Million loss in 1H2021 to a $423 Million profit in 1H2022.

As a whole, most of their reported numbers show a huge improvement over the past year however I believe that the question that investors should be asking themselves are where these gains came from and if they are sustainable. To this end, of all their business units, I’ve identified the following as points of interest for discussion.

  1. Hongkong Land + 20% underlying profit
  2. DFI -40% underlying loss
  3. Astra +58% underlying profit
  4. THACO +43% underlying profit
  5. Hotels Under management -69% Underlying Loss

1) HK Land: Diversified property portfolio proves resilient

In the aftermath of the Evergrande episode, market sentiment in the mainland Chinese property market continues to be weak. Despite this, investors should be relieved to see that their underlying net profit has actually increased this 1H2022. Though the increase is by just 8%, this is indeed commendable given how their diversified portfolio has clearly allowed them to perform better than 1H2021.

Here are some quick snippets from their earnings call which reflect the situation in their respective markets,

  • Hong Kong – Signs of recovery in office rentals. Slight improvement in physical vacancy and psft rates as compared to 1H2021. ” Tourism has not yet returned to Hong Kong, due to a combination of travel and quarantine restrictions, adversely impacting retail sales levels.”
  • Shanghai – Lockdowns caused suspension in local projects which will cause delays further down the road.
  • Singapore – Average rent increase from S$10.30 per sqft in 1H2021 to S$10.50 per sqft at present indicating recovery in this sector. Likely to continue to rise as more businesses start relooking WFH policies.

2) DFI Retail Group: a letdown this season

Most investors have the mindset that retailers in general have what is know as “pricing power” hence whatever increases in cost they experience are in one way or another passed on to their customers. I’d certainly expect DFI (formerly Dairy Farm International), whose grocery businesses are considered to be relatively demand inelastic in nature, to have done well this 1H2022 given that despite macroeconomic challenges.

However the recent earnings from DFI has most certainly been a disastrous letdown where they reported a $52 net loss this 1H2022 as compared to a $32 million net profit back in 1H2021. Upon digging deeper into their earnings report, I’ve found it difficult to find a compelling bullish argument despite the reassurances from the company that “additional investment being made to advance digital capabilities, and improve stores and the Group’s operating standards”. If it matters at all, digitalization is something that I find rather …. “last season”.

Other challenges which DFI cites in this report include,

  • Reduced profit contributions from Grocery Retail and Convenience, which faced a combination of inflation and continuing customer behaviour shifts
  • Substantial loss incurred by Yonghui for the fourth quarter of 2021. (US $64 Million loss)
  • Maxim’s performance was also significantly adversely impacted by the surge in COVID-19 cases within Hong Kong and resulting Government imposed restrictions on dining. (US $26 Million loss)

Management guidance is adequate at best indications that it is likely that FY2022 will be “materially lower” than that of FY2021. Caution is advised.

3) Astra: Jardine’s Best Performing Business Unit may not sustain profits

Astra was the best performing business unit for Jardine this season as their underlying net profit improved by 58% within a year. For those unfamiliar with Astra, they are actually behind many popular consumer car brands.

It manufactures, assembles, distributes and owns dealership networks for Toyota, Daihatsu, Isuzu, Peugeot, UD Trucks and Honda motorcycles. It also manufactures and retails BMW vehicles, and owns the Lexus cars dealership.

Jardine Cycle & Carriage

What is interesting about Astra this season is that their heavy equipment and infrastructure & logistics division experienced another continued bull run. In my opinion, this is a clear indication of how Astra has been a huge benefactor of Covid restrictions being lifted, as they do very much provide the “wheels” to the economy.

As we move into 2023, I do expect economies to normalize hence this rapid spike may see some relief in the second half of this year.

4) THACO: Pace of sale may slow down in future

Predominantly operating in Vietnam as an automobile manufacturer, THACO is short for Truong Hai Auto Corporation. They are considered to be one of the pioneers in the Vietnamese car industry with the company being funded 25 years ago back in 1997. Hence, it is safe to deduce that Jardine does have vested interest in a rapidly growing economy such as Vietnam’s.

While it is not stated in their report as to the breakdown of THACO’s profits, it is likely that the bulk of their income came from automobile/motorcycle sales given that most consumers would indeed be looking to purchase new vehicles as the Covid situation in Vietnam normalized.

In terms of the continuation of their performance, it seem apparent that global shortages are starting to slow the pace of auto sales in Vietnam.

Auto sales plunged 57 percent in June to 25,159 units, ending three consecutive months of gains, as supply plummeted due to a shortage of parts.

Auto sales plunge in June

Bearing in mind that earnings are often not forward-looking in nature, this may be an indication that such stellar growth may not be sustainable in the long run.

Source: VNexpress.net

5) Hotels Under Management: could ride the strong leisure demand to greater profits

Of all the business units at Jardine, I’m feeling most optimistic about their hospitality businesses. In all likelihood, there is a chance that we can see the underlying profit in this business unit turn green in their 2H2022 report. This can be attributed to “strong leisure demand” which I think is something that would take at least a year to benefit travel/leisure companies.

In this recent 1H2022 report, it is clear that the lifting of borders in Asia has already made an immediate impact on their financials causing revenue to rise by 78% from $382 million back in 1H2021 to $679 million at present in 1H2022.

Moving forward, we are seeing consistent month-on-month increases in room rates which in my opinion also likely reflect that of situation in the region. Investors can look forward to better results in this business unit should both leisure demand and room rates continue to rise in tandem.

FY2022 Outlook for Jardine Matheson

The market rotation from growth to value has indeed worked in favor of Jardine.

In an inflationary environment, I believe that investors prefer more tangle and “realistic” business over “metaverse” related ideas. This also works in favor of Jardine. However, given that much of this impressive 1H2022 can be attributed mostly to economic recovery, consideration should be given towards how this recovery may actually normalize amidst global economic conditions.

To this end, management expects the company to remain resilient despite market conditions but growth to “substantially moderate” in the full year.

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