Chlorophyll Inc

The growing influence of Jardine in local stock markets

by Chlorophyll Inc September 12, 2017

The Jardine Group of Companies including Jardine Matheson, Jardine Strategic, Jardine Cycle and Carriage, Dairy Farm, Hong Kong Land, and Mandarin Oriental has become a growing influence among the 800 over stocks listed in Singapore. Altogether, the total market capitalization the combined listed entities under the Jardine Group stands at around S$120.39 billion as of August 31, 2017. The recent inclusion of Jardine Strategic into the Straits Times Index (STI) is a testament of the growing strength of Jardine Empire in its 100 over year’s history as a major trading conglomerate.

Brief History of the Jardine Group of Companies

Jardine Matheson Co. was founded over 100 years ago on July 1, 1832 by two individuals, William Jardine, and James Matheson. Both individuals were United Kingdom citizens. According to Wikipedia, following the cession of Hong Kong under the 1842 Treaty of Nanking, the firm set up headquarters on the island.

The company started out as a trading company dealing in smuggled opium, tea, and cotton, but it soon diversified into areas including insurance, shipping and railways.

During the 1970s, Jardine Matheson was managed by the influential Keswick family. The firm’s patriarch, Sir Henry Keswick took charge of the firm, while brother, Simon took over in the early 1980s. The company is now managed by Simon’s son, Ben Keswick, and Adam Keswick, one of sons of Sir Chips Keswick.

Background of Jardine Strategic Holdings (JMH)

Jardine Strategic Holdings (JMH) Limited is a holding company and has controlling interests in Jardine Matheson, Dairy Farm, Hongkong Land, Mandarin Oriental, and Cycle and Carriage Group, a local diversified dealership distributor for Mercedes Benz, Kia Motors, and Mitsubishi Motors vehicles.

Fundamentals of JMH

According to research provided by Bloomberg.com, and Reuters.com. Jardine Strategic Holdings (JSH) currently trades at trailing 12-month (ttm) price-earnings (P/E) multiples of 6.65, and its dividend yield is 1.55 per cent as compared to the industry average of 2.19 per cent. On a five-year average, the company yields around 1.43 per cent, as compared to 2.40 per cent for the industry.

While miniscule in terms of JSH’s dividend yield compared to the industry, the 5-year dividend growth rate is 7.72 per cent, compared to the industry’s minus 3.46 per cent dividend growth rate for the same time period. This translates to a dividend payout ratio of 12.17 times for the company.

On the top and bottom line growth for JSH, total sales in the most recent quarter (MRQ) rose by 26.5 per cent, while net profits rose by a bigger percentage at 298.8 per cent, largely due to better profit performances from Hongkong Land, whose commercial interests performed well and it recorded higher level of sale completions in its development properties. Astra, its Indonesia motorcycle business, performed well, and Permata Bank performed well as well.

Jardine Matheson business performed well in its directly held businesses. Dairy Farm came in with mixed performance, and Mandarin Oriental’s results were impacted primarily by its London hotel renovation. The contributions from Jardine Cycle & Carriage’s non-Astra interests were lower.

Technical Analysis of JSH

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of Jardine Strategic Holdings (JSH), September 11, 2017)

At the closing price of S$44.25 per share on September 11, 2017, the stock is trading close to its 52-week high of S$44.95.

Looking closer on the chart, we note that the stock is trading at above the 50-day and 100-day moving averages (MAs), and the relative strength index (RSI) (not shown on the diagram) stands at around 65 to 66. It is somewhat close to an ‘Overbought’ situation where the benchmark for that level is 70.

The trading volume is not substantial as average turnover stands at around 320,473 shares. The total volume traded as of close of regular trading on September 11 stood at around 360,000 shares.

Research coverage of JSH

With the impending inclusion of JSH onto the Straits Times Index (STI) on September 18, there is no active research coverage for JSH.

Our thoughts on Jardine Strategic Holdings

We think that at the current price of S$44.25, it is on a track to move higher, and might test the 52-week high. We think that it is a positive market event for Jardine Strategic Holdings to be included in the Straits Times Index (STI) on September 18.

There is no doubt that at 6 to 7 times earnings multiples, the conglomerate looks quite attractive. However, we think that there is a need to understand the fundamentals of each of its subsidiaries before making any investment decision. We think that it is important to understand the individual parts of the business like Dairy Farm, Mandarin Oriental, Astra International, and Jardine Matheson among others to determine a fair valuation for JSH as a whole.

We noted that it is expected to be quite a comprehensive task, and we do not think that the 6 to 7 times P/E necessarily values the company meaningfully. We urge readers and investors to carefully understand the conglomerate company, and the individual companies JSH holds before making an investment decision.

We would also like to highlight the lack of research coverage, and the relatively low trading volume for the stocks as some of the factors to take into consideration before making an investment decision on JSH.

In summary, it is important to understand the business of JSH, and how individual businesses contribute to the total value of JSH. Good luck!

Disclaimer of Opinion

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REITS ARE TRENDING UPWARDS LIKE NO TOMORROW

by Chlorophyll Inc August 07, 2017

A question many investors have often finance industry professionals like ourselves, is this the time to let go of their real estate investment trust (Reit) stocks given that the US Federal Reserve is expected to normalise interest rates soon, and reduce their quantitative easing (QE) measures.

In this article, we shall examine this hotly asked question by retail investors. We’ll start off by looking at FTSE ST Real Estate Investment Trust (REIT) Index. Here is the chart diagram:

Source: Phillip POEMS Trading Platform (One-year daily chart for FTSE ST REIT Index, July 25, 2017)

Looking at the chart above, we noted that the FTSE ST REIT Index chart is climbing higher, signalling possible discounting of the impact of higher interest rates. The average directional index (ADX) below is showing positive directional indicators (DIs) outpacing the negative Dis, and showing positive momentum.

Likewise, the recently debuted NikkoAM – Straits Trading Corporation Asia REIT Index exchange traded fund (ETF) is making new highs since its maiden debut in April. The issue was priced initially at $1.00. The latest price as of market close on July 25, 2017 is $1.094 or a 9.4 per cent during the period from April 2017.

Source: Phillip POEMS trading platform (One-year daily chart of Nikko AM – STC Asia Reit Index ETF, July 25, 2017)

We noted that even though the ETF trades on relatively low volumes for a large part of the period from April 2017 till date, the index ETF did experience a spike in trading volumes when the price hit $1.103 end of June. It declined briefly, and has since staged a turnaround since mid-July 2017. We noted that the down shift in the index in late June coincided with the aftermath of the US Federal Reserve Meeting where monetary policy makers decided to hike the interest rate to minimise any excessive risk-taking. However, the index started to rise as Fed chairperson Janet Yellen started to talk down on further interest rate hikes, noting the benign US inflation rates. Instead, most of the focus is the unwinding of the US$4.5 trillion balance debt by end of the year which Chairperson Yellen noted its importance on several occasions.

The Nikko AM-STC Asia REIT Index ETF physically replicates the performance of the FTSE EPRA/NAREIT Asia ex-Japan Net Total Return REIT Index. According to data from Phillip Securities, and Nikko Asset Management, since the debut of the index, total assets under management (AUM) rose from S$56.3 million to $72.6 million as of end June 2017.

The Nikko AM-STC Asia REIT Index ETF has a substantial exposure to Singapore Reits (S-Reits), followed by other Reits in the Asia-Pacific region including Malaysia, and Hong Kong, among others.

Likewise, for the Phillip Asia-Pacific (AP) Dividend Reit ETF, we noted that the index has also staged an upturn after a heavy sell down for about a month from mid-June to around mid-July 2017.

Source: Phillip POEMS trading platform (One-year daily chart of the Phillip SGX APAC Dividend Leaders ETF, July 26, 2017)

We also noted that the chart is staging an upturn, albeit a relatively low trading volume. Although the trend is heading up along with the 50-day and 100-day moving averages (MA) crossovers, it is challenging to discern any significance without seeing a corresponding rise in the trading volume.

A brief introduction of the Phillip SGX APAC Dividend Leaders ETF. According to the Phillip Securities marketing materials, this exchange traded fund product seeks to obtain a broad exposure to quality real estate investment trust assets in the region. The ETF utilises a smart beta strategy which ranks and weight the underlying Reits according to total dividends paid in the preceding 12 months, with the aim of enhancing returns above that of the traditional market cap-weighted ETFs. The ETF comes in both Singapore Dollars and US Dollars.

Phillip Capital Management came out with a research paper noting on the impact of rising interest rates on Reit returns. They noted that due to the nature of S-Reits being a dividend-yielding focused asset, the main focus is not on capital appreciation, but on the sustainability and continuity of distributions. They also noted that based on historical track record, Reits have often bounced back following an interest rate hike. A chart extract from the research note is shown here:

Source: Phillip Capital Management (July 26, 2017)

Readers might note that following the taper tantrum in May 2013, the S&P Asia Pacific Reit returns often bounce back. They noted that since 2011, they saw an inverse relationship between US 10-year Treasury yield and APAC REIT Total returns. They noted that in 2013 when the US Federal Reserve (Fed) first raised rates, they saw a rise in the 10-year Treasury yield. Although the APAC Reits were impacted when as a group, they lost almost 18 per cent of value in just a month. However, it bounced back within six months and went on to gain almost 50 per cent from its lowest point over the next few years.

Similarly, in 2016, after an actual short-term rate hike, the APAC Reits fell by around 14 per cent. However, after four months, the trends reversed, and the APAC Reits rose by an average of 9 per cent in six months.

Should investors be express deep concerns on the impact of interest rates of Reit returns

In summary, we think that based on the charts and research, most of the Reits, including S-Reits have generally bounced back from several knee-jerk reactions by investors towards interest rate hike announcements. However, we do caution that most of the data is based on historical trends, and there is no certainty on whether future events will show similar trends.

However, we feel that in such down shift situations, investors are likely to be presented with opportunities to look for good quality S-Reits with low leverage ratios, strong fundamentals, and experienced management teams, among other attributes before investing in such Reit names. It is also highly important that investors do their thorough research and due diligence before putting on the S-Reits in their individual portfolios.