Elimination of the dual holding company structure will improve governance and simplify valuation analysis (company announcement). The discounted price will be significantly accretive for Net Asset Value and Earnings of Jardine Matheson.
Here are excerpts from notes about the Jardine Group that I shared privately last fall. I am not sharing a valuation analysis so the text will only be of interest to people who want to know more about the company background.
Jardine is a 188 year old conglomerate ranked #280 on the Fortune Global 500 with:
- 464,000 employees
- US$103Bn Revenue
- US$97Bn Assets
The company no longer receives much attention from investors and analysts due to its complex dual holding company structure, the breadth of its operations, and current challenges in its end markets. Jardine Matheson’s share price has fallen about 42% from its 2019 peak and is all the way back to 2010 levels even though equity value is 115% higher. It provides an opportunity to profit from a post-COVID recovery over 1-3 years and then long-term participation in growing markets over 5-10 years.
Corporate Structure and Relevant History
William Jardine, the founder this dynastic enterprise, died with no children so control passed to William Keswick, the son of his niece. The structure through which his descendants maintain control despite a direct ownership interest of only about 17% is responsible for some of the corporate complexity which has implications for valuation and shareholder returns.
The Keswick family unwisely retained a stake of only about 10% when Jardine Matheson listed on the Hong Kong Stock Exchange in 1961. During the 1970s several prominent colonial peers were taken over by local tycoons willing to bet more aggressively on the territory’s future prosperity. Fearing that it was being targeted by Li Ka Shing or YK Pao, Jardine Matheson launched a dawn raid raid on its own shares in November 1980. The company placed orders for open market purchase of 10% of the shares of HongKong Land (bringing its ownership over 40%) while HongKong Land simultaneously placed orders to buy 10% of Jardines (bringing its ownership over 30%). Each firm then owned enough to prevent any outside party from gaining a controlling interest. The arrangement was refined in 1986 through the creation of Jardine Strategic as an intermediate holding company. Subsequent open market purchases (which have continued through this year) have raised Jardine Matheson’s stake in Jardine Strategic to 85% while Jardine Strategic now owns 58% of Jardine Matheson. The Keswick family stake in Jardine Matheson is still relatively small, but the Board of each holding company is effectively controlled by the Board of the other so the votes of shareholders (even the Keswicks) are irrelevant.
The current corporate structure:
Wary that Chinese control of Hong Kong from 1997 could facilitate a hostile takeover, Jardine moved the domiciles for its major businesses to Bermuda in the 1980s and the primary listing of its group companies to London in 1994 with secondary listings in Bermuda and Singapore (where the majority of trading occurs).
In 2000-2001 Brandes Investment Partners launched proxy fights to force Jardine Matheson to privatize Jardine Strategic (at a proposed price between US$4.25-5.25share). This would have restored power to public shareholders and reduced the corporate complexity which depressed share valuation. The legal argument that would have required the Directors to act on the consolidation proposal did not end up being tested in court because the proposal only received support from 13% of Jardine Matheson shareholders.
The period of the proxy battle coincided with the beginning of Jardine’s extremely profitable long-term investments into Southeast Asia as it acquired control of Singapore-based Cycle & Carriage which acquired control during the same period of Astra International, an Indonesian conglomerate. Jardine Strategic remained public, the holding company discount was never removed, but anybody who held Jardine Strategic (or Jardine Matheson) for the past two decades enjoyed a very high return.
The consolidation of Matheson and Strategic would simplify the business for investors leading to an immediate valuation boost, but there’s no reason to expect it to happen in the near-term. If the Keswick control of the consolidated equity passed 30% then their benefit from the current dual holding company structure would diminish. It’s possible that change could result from disputes within the Keswick family, between the beneficiaries of the family trusts, or within the board of Directors that break the current structure of control. Great Eagle Holdings provides an interesting example as the nine beneficiaries of the trust established by the founders split into two factions.
Jardine continues to pursue its historical niche. It’s an international partner for local Asian firms that benefit from access to capital and expertise. It’s a local partner for international firms. These collaborations often result in mixed ownership which may have economic rationale, but create additional complexity for external analysis. Jardine participates in a range of businesses so broad that it’s impossible for an outside investor to understand all of them and there’s a real risk that corporate management may not understand it all themselves. A few important themes:
- Real Estate (29% of 2019 profits) Hong Kong Land owns prime financial district investment properties in Hong Kong and Singapore. It has a similar complex under development in Shanghai. It develops residential property for sale in China and Southeast Asia.
- Automotive (24% of 2019 profits) Jardine owns vehicle sales/service businesses in many countries with Indonesia (via Astra) being the most important market. Jardine also has smaller exposure to manufacturing of vehicles and parts through Astra in Indonesia and Truong Hai in Vietnam
- Consumer (16% of 2019 profits) Dairy Farm operates a variety of retail businesses and restaurants across Asia
The corporate pyramid includes layers of publicly held subsidiaries. It would be a monumental task to evaluate the business from the bottom up which is why I don’t see any analysts doing it.
Jardine presents significant challenges for accountants and analysts.
- Matheson/Strategic: Each company’s largest asset is a stake in the other so how should that be valued?
- Book/Fair/Market Valuations: Different Jardine operating subsidiaries apply different accounting rules in determining asset values in financial reporting. Jardine Strategic reports a “Net Asset Value” based on market values of listed subsidiaries. Jardine Matheson reports a “Net Asset Value” based on the book value of listed subsidiaries, some of which are assessed at current market value and some at historical cost. Mathematical consolidation of the numbers becomes misleading.
Conclusions from the valuation analysis:
- Jardine Strategic is significantly cheaper than Jardine Matheson
- By any measure both stocks are trading well-below asset value
- HongKong Land is the most important asset. Improved investor perception of its business would provide the best near-term opportunity to narrow the gap between market values and fair values.
- A diversified business that has compounded equity value at 20% per year since 2003 and is priced at these levels is an extremely attractive investment.
At the time of publication the author was a unitholder of Jardine Strategic. Investors are encouraged to check all of the key facts cited here from SGX regulatory filings and other sources prior to making any investment decisions.
The text was written in September 2020 and not updated for any subsequent events. It worked out pretty well ;)