Full Year 2015 Jardine Matheson Holdings Ltd Analysts Presentation

Mar 04, 2016 AM EST
J36.SI - Jardine Matheson Holdings Ltd
Full Year 2015 Jardine Matheson Holdings Ltd Analysts Presentation
Mar 04, 2016 / NTS GMT 

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Corporate Participants
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   *  Ben Keswick
      Jardine Matheson Holdings Ltd - Chairman and MD
   *  James Riley
      Jardine Matheson Holdings Ltd - Group FD

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Presentation
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 Ben Keswick,  Jardine Matheson Holdings Ltd - Chairman and MD   [1]
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 Good morning everybody. We'll get started. So very nice to have you here. I hope you can hear everything I'm saying through my sniffles. I'm afraid I've got a bit of a cold at the moment so I hope you can hear me through that. But I'm going to take you through Jardine Matheson's 2015 annual results.

 I'll start by giving you a brief overview of our performance and then touch on some of the major developments across the Group that took place last year. Finally, I'll provide you with my views of the outlook for 2016. James, our Group Finance Director, will then provide more details of the year's results including those of the individual companies. And as usual, we'll be happy to take any of your questions at the end.

 You should note that all dollar figures, unless otherwise mentioned, will be in US dollars.

 This shows the effective interest that JMH has in each of the companies, together with the share of profit which we derived from each of our main Group companies in 2015. The largest contributors to underlying profit remain as Astra, Hongkong Land and Dairy Farm.

 The Group's profit attributable to shareholders rose by 5% to $1.8b. For the year as a whole the Group's revenue including a 100% of associates and joint ventures rose by 4% to $65.3b. Despite this, the Group's underlying pre-tax profit for 2015 declined by 21% to $3.5b. Underlying profit attributable to shareholders was 11% lower at $1.36b, while underlying earnings per share were 12% lower at $3.65. The Board is recommending a final dividend of $1.07 per share which, together with the interim dividend, represents an unchanged dividend for the year as a whole.

 Looking at some of the contributions at the business unit level, Jardine Pacific was up with solid performances from its engineering construction activities.

 Jardine Motors saw results down on last year.

 JLT's reduced profits reflected lower revenue from the UK employee benefits business and the cost incurred in building its US specialty business.

 Hongkong Land's results were slightly down with a strong performance from the commercial portfolio offset by a reduction in residential earnings.

 Dairy Farm delivered a weaker profit performance in the face of a challenging retail environment in many of its markets.

 Mandarin Oriental saw profits slightly down on last year's record result due to reduced demand in some key markets and the renovation at a number of the properties.

 JC&C performed exceptionally well with a strong set of results driven by Vietnam, Singapore and Malaysia motor businesses, and a first contribution from the Siam City Cement investment.

 While Astra recorded reduced profit contribution from all its major segments, its operations remain market leaders in Indonesia.

 There were a number of business developments across the Group during the year, of which I would like to mention a few. Hongkong Land embarked upon two new joint venture developments in mainland China with the acquisition of further residential sites adjacent to its Bamboo Grove project in Chongqing as well as a sizeable residential and commercial development in Pudong, Shanghai. Construction of its retail complex in Beijing, WF Central, is progressing well.

 Dairy Farm continued to pursue its long-term growth plans with two strategic acquisitions. In March 2015 it acquired San Miu, the leading supermarket chain in Macau, and in April 2015 it completed its acquisition of a 20% stake in Yonghui Superstores in mainland China.

 Mandarin Oriental purchased the iconic Hotel Ritz in Madrid in joint venture with Olayan Group in May and has announced but not yet completed the purchase of the Mandarin Oriental Boston. During the year, Mandarin also raised $316m by way of a rights issue which facilitated the funding of these acquisitions as well as the proposed refurbishment of its London property due to begin in the third quarter of 2016.

 Astra's new life insurance joint venture with Aviva is trading well and has acquired 28,500 individual life customers and more than 180,000 participants in its corporate employee benefits program. While recently acquiring its general contractor Acset, Indonesia reported increased contracts during the year. Anandamaya Residences, the Group's luxury residential development in Jakarta continued to attract buyer interest.

 Jardine Cycle & Carriage made a significant strategic investment with the acquisition of a 24.9% stake in the listed Siam City Cement, the second largest cement manufacturer in Thailand. This gives the Group exposure to the Thai economy and is an interesting new business segment for the Group, although one in which we have been in and have had previous experience.

 Jardine Motors is investing some $220m to acquire a flagship property in Hong Kong that will combine most of Zung Fu's Mercedes sales, service and administration activities on a single site. The cost of this development will be funded in part with the sale of existing properties.

 Performance-wise, a number of the Group's markets saw further downward pressure on demand while costs continued to rise. In view of the poor trading environment, the Group's businesses produced some very credible performances. While the current economic conditions in China and Indonesia, two of our principal markets, are expected to continue to affect the Group's profitability in 2016, we remain positive about the mid-term prospects for our companies.

 We also possess sound finances, have clear strategic objectives and are well positioned to benefit from the increased spread of affluence in the region. These tough times also open the door to opportunities. With our strong balance sheet, we are well-positioned to capitalize on such opportunities.

 I'll now pass the podium over to James who'll take us through our businesses in more details. Thank you.

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 James Riley,  Jardine Matheson Holdings Ltd - Group FD   [2]
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 Thank you, Ben, and good morning. Before I go through the financial results, I'd just like to raise my recurring reminder that the Group uses underlying profit attributable to shareholders as its key earnings performance measure. And to keep things simple, I'll refer to this as underlying profit. This measure, which excludes what we call non-trading items, which are specifically defined by an accounting policy in our accounts, is intended to help provide a clear understanding of the ongoing business performance of the Group.

 Ben has touched on the underlying profit contribution for the Group in overall terms. I will cover other elements of the financial statements and further elaborate on each of the businesses in turn.

 Non-trading items for the year totaled $434m. The main non-trading item was as usual a change in the independent valuation of investment properties at Hongkong Land. A profit of $104m was realized on the sale of the Group's investment in Acleda Bank.

 The asset impairment figure comprises an impairment provision made against Jardine Strategic's investment in Zhongsheng, the JMH share being $156m, which was offset by the reversal of the impairment charge made against Jardine Cycle & Carriage's investment in THACO in 2012, our share of this being $26m.

 The carrying value of investments such as Zhongsheng are marked to market each period, with the change in value being taken to reserves. However, if there is a prolonged fall in the value of the investment, accounting conventions require that this be treated as an impairment and that the whole of the decline in value be taken through the profit and loss account. This is what we have now done for Zhongsheng, although we continue to have confidence in this as an investment. Hopefully, as with THACO, we will see this impairment provision reverse in time.

 The Group's balance sheet remains strong at the end of 2015. Total equity increased by 2% to $45.8b and shareholder's funds rose by 4% to $19.9b. Jardine Matheson's consolidated net debt at the end of 2015, excluding financial services companies was $3b, which compares to $2.5b at the end of 2014 representing gearing little changed at 6%. The Group also had net borrowings of $3.2b in its financial services companies, which comprise primarily the automotive finance businesses within Astra.

 Focusing on the Group debt, excluding the financial services companies, I've broken this down by business unit here. You can see that the principal borrowing vehicle within the Group is Hongkong Land where we have gearing of 8%. The other two major borrowing units are Dairy Farm with net debt of $482m and Jardine Pacific/Jardine Motors with net debt of $581m.

 In the case of Dairy Farm, which now has net debt for the first time for many years, this is due to its investment in Yonghui Superstores. The Jardine Pacific and Jardine Motors net debt is slightly higher than normal due to the purchase of the new site in Hong Kong. But, as Ben noted, we would expect some of this to be paid down by the sale of other properties. Mandarin Oriental has net debt of $132m, down from $403m at the end of 2014 due to the rights issue it had in the first half of the year. Astra has a net cash position of $132m compared to net debt of $236m in 2014 due to strong working capital inflows.

 The three main corporate holding companies are debt free. Jardine Strategic Corporate's net cash position dropped by $414m to $208m over the year due primarily to its subscription for the rights issue of both Jardine Cycle & Carriage and Mandarin Oriental.

 The Group continues to benefit from strong operating cash flows, ample committed facilities and access to the capital markets. This has continued to provide a sound financial base on which to continue to invest in both our existing and new businesses.

 The cash inflow from operating activities for the year was $4.1b, an increase from the previous year of $764m. This increase was primarily due to lower development expenditure and higher property sales on residential projects in Hongkong Land in Singapore, and a limited additional working capital usage in Astra, in contrast to 2014 when the working capital requirements of businesses such as Hongkong Land and Astra's heavy equipment businesses increased considerably.

 Gross capital expenditure, as defined in the consolidated cash flow statement, increased to $4b, which was broadly spread throughout the Group. The main elements were $2b for investments in various associates and joint ventures including Dairy Farm's investment in Yonghui Superstores, Hongkong Land's property joint ventures in mainland China, Mandarin Oriental's investment in the Ritz in Madrid and JC&C's investment in Siam City Cement. And $1.1b for the purchase of tangible assets including Jardine Motors' $220m acquisition of a flagship property in Hong Kong and $450m spent in Astra, $198m of which was for the acquisition of heavy equipment and machinery in Pamapersada and Nusantara.

 There are various other areas of expenditure which we think of as CapEx, even if they are not technically described as such in the cash flow statement. These include $275m spent on acquiring additional shares in Group subsidiaries during the course of the year, principally in Jardine Strategic, $753m invested in trading properties by Hongkong Land and the $1.5b of CapEx spent by associates and joint ventures. The total of what I would more broadly describe as CapEx is thus some $6.5b, which is $850m above the figure for 2014.

 I'll now move to the businesses. Jardine Pacific performed well with underlying profit of $142m, a 9% increase from 2014. This was attributable to improved performances in a number of the JP businesses.

 Jardine Schindler remains the biggest contributor to Jardine Pacific with a growing portfolio of installed units and stable margins contributing to another strong performance. In 2015 earnings were derived from across 12 territories in which it operates, with profits from territories outside of Hong Kong now contributing just over 50% of EBIT. The business had an excellent order backlog and is the market leader in its overall territory.

 JEC performed well in its core Hong Kong operations, but its profit gain was held back by softer earnings outside Hong Kong and from its joint venture interests with Trane.

 Gammon had a satisfactory year with earnings growth of 4% and a strong order book of $3.5b at year end. Gammon is currently one of the top players in Hong Kong with a market share of around 10% and also has operations in Macau, Singapore and Vietnam. Ongoing large projects include the express rail link terminal in West Kowloon, the midfield terminal at Hong Kong International Airport and the southern viaduct of the Tuen Mun-Chek Lap Kok link. New awards in 2015 included the renovation of the Murray Building, large residential development in Tseung Kwan O and Chung Wan city side.

 Earnings from Hong Kong air cargo terminals fell by 23% during the year, as a result of reduced cargo throughput at the airport and pressure on margins from the competitive environment and excess capacity at the airport.

 Offsetting this decline was a strong contribution from Jardine Shipping Services. During the year, the core port agency business was sold at a loss and the earnings to which we were entitled from the remaining two years of the UASAC joint venture were paid early in return from an early termination of the joint venture. The loss on sale was taken as non-trading whilst the accelerated joint venture earnings were taken at an underlying level.

 This brings to an end the Group's involvement in the shipping industry. Underlying earnings from shipping in 2015 were $13m and there will be no further earnings from shipping in 2016.

 Jardine Restaurants maintained a stable contribution following its strong recovery in 2014. The Hong Kong businesses made a slightly lower contribution in an increasingly difficult trading environment. There was some growth from Taiwan while trading in Vietnam continues to be challenging. The turnaround within JTH's technology support business is continuing, although the profit was slightly lower in 2015 due to restructuring costs and a weaker IT market in the second half.

 Jardine Motors produced an underlying profit of $77m, down from $97m in the prior year. Zung Fu in Hong Kong and Macau saw sales and margins fall following a record year in 2014, which benefited from a full year of sales for the new S-Class model. Results were steady in mainland China where Zung Fu helped Daimler gain market share with higher new car sales. But this was achieved at the expense of margins. The United Kingdom dealerships achieved improved earnings even in US dollar terms despite the weaker sterling with a solid trading performance and $10m of property profits. This was a similar level of property profits to that realized in 2014.

 Zhongsheng Group, which we continue to account for as an investment, achieved increased unit sales but, like Zung Fu in mainland China, this was at the expense of margins.

 Jardine Lloyd Thompson's total revenue for 2015 was $1.8b, an increase of 5% in its reporting currency. The underlying trading profit decreased by 5% in its reporting currency to $286m reflecting both the lower revenues of its employee benefits business in the United Kingdom and the costs incurred in growing JLT's nascent specialty business in the United States. In addition, JLT incurred costs in relation to the restructuring of a number of its businesses. JLT's contribution to the Group's underlying profit was 17% lower on conversion into US dollars.

 JLT's risk and insurance operations, which represent some 75% of turnover, produced a 5% organic growth in revenues, with good performances from its specialty and reinsurance businesses as well as its Asian and Latin American operations. The growth of the US specialty business remains on track but the costs of this will continue at a similar level in 2016.

 The employee benefits operations on the other hand had a 6% fall in organic revenues. The UK business in particular faced challenges due to structural changes in the United Kingdom pensions industry and a slowdown in client activity. The international employee benefits operations delivered 7% growth in organic revenues.

 That completes my review of the businesses held directly under Jardine Matheson. I will now turn to Jardine Strategic, whose underlying profit was 11% lower at $1.4b with underlying earnings per share lower at $2.38. The net asset value per share shown for Jardine Strategic is calculated by reference to the market value of the underlying investment held by Jardine Strategic and at December 31, this was down 13% to $49.99 per share. The Jardine Strategic dividend for the full year will be increased by 6% to $0.285 per share.

 Moving on to the main listed companies under Jardine Strategic, Hongkong Land produced a solid performance in 2015, with an underlying profit attributable to shareholders of $905m, down 3%. Results from its commercial portfolio remain strong although earnings from the residential sector declined despite an improvement in mainland China and the benefit of a gain recognized on a redeveloped property in Hong Kong. The profit attributable to shareholders of $2b included revaluation gains of $1.1b. Hongkong Land remains well financed with net debt of $2.3b at the year end and gearing of 8%.

 In commercial property conditions in the Hong Kong office leasing market were moderately positive. Vacancy in the Group's Central portfolio improved to 3.4% at the end of 2015 and rental reversions were marginally positive. The retail portfolio remained fully occupied with positive rent reversions. In Singapore vacancy in its office portfolio at the year-end was down to 1% included committed space under new leases.

 As anticipated, the contribution from Hongkong Land's residential interests was lower. There was a solid performance from mainland China despite the challenging markets and in Singapore its wholly-owned subsidiary MCL Land completed three projects. Satisfactory progress continues to be made in its residential projects in Indonesia and the Philippines. In Hong Kong, while there was a $63m gain from the redevelopment of a residential property owned by the Group, the overall contribution declined due to the absence of the Serenade sales seen in 2014.

 Dairy Farms' food division and health and beauty division reported lower profits despite some key businesses achieving positive like-for-like sales growth.

 The operating environment for the food division was especially fragile in 2015. In the face of such headwinds, the performance in Greater China including Hong Kong was marginally up. Profits in Singapore and Malaysia were lower in challenging trading conditions. The results in the Philippines showed improvement. Progress was made in developing the business in Indonesia by improving the fresh offer, improving price perception and growing like-for-like sales, although margin investment cost inflation and higher stock provisions continued to impact profitability.

 The convenience store operations in Hong Kong and Mainland China performed well, but in Singapore regulatory restrictions dampened sales performance and profitability.

 In the health and beauty division, Hong Kong and Macau reported further growth in sales and profits despite the slowdown in mainland tourist arrivals. In Singapore improved profits were achieved despite increased costs, but the overall results for the division were held back by a disappointing performance in Malaysia. In the Philippines good progress was made on the integration of the Rose Pharmacy business. Further investments were made in the corporate brand program and in renovating existing stores.

 In home furnishings, the IKEA businesses had an outstanding year. Hong Kong and Taiwan traded well, while the first store in Indonesia performed ahead of expectations in its first full year following its opening in October 2014.

 Maxim's delivered another year of solid results, with continued expansion of its Chinese casual dining restaurants and Japanese restaurants in mainland China and Starbucks in Indochina.

 As mentioned in March, Dairy Farm acquired the 15-store Macau supermarket chain San Miu and in April completed the purchase of a 20% interest in the leading mainland chain, Yonghui Superstores. It will invest a further $200m to maintain its interest in Yonghui when JD.com, the Chinese Internet retailer takes a 10% interest.

 To meet the local regulatory requirements in Malaysia, 30% of the ordinary shares in its food retail business, GCH Malaysia, were sold during the year.

 Mandarin Oriental achieved underlying profit of $90m, a 7% decrease on the prior year's record result which had benefited from branding fees from residences.

 The Asian hotels produced a lower contribution despite an improved performance in Tokyo, due to softer demand in Hong Kong and Singapore as well as disruption from a renovation in Kuala Lumpur.

 The Group's performance in Europe was negatively impacted by challenging conditions in Paris following the terrorist attacks and the renovation in Munich which was partially offset by an improved result from London.

 All of the Group's hotels in North America reported higher revenue per available room, other than New York, which had a suite refurbishment program.

 As previously mentioned, the company raised $316m by way of a rights issue in April with the proceeds reducing debt and funding the acquisition of Mandarin's 50% share of the Hotel Ritz Madrid. This year, the Group will acquire the property of its Boston hotel for $140m and is to commence a $126m refurbishment of the Mandarin Oriental Hyde Park in London.

 Now moving to Singapore and our Singapore-based holding company, Jardine Cycle & Carriage. Astra's contribution was $477m, 34% lower than in 2014 due in part to a 12% decline in the average rupiah exchange rate.

 The contribution from direct motor interests was up 71% at $141m and there was a $30m first-time contribution from other interests. Within the direct motor interests, 27% owned THACO in Vietnam enjoyed an excellent year, producing a contribution of $85m, up from $39m in 2014 following strong sales and enhanced margins.

 Earnings from the wholly-owned Singapore motor operations rose 17% to $39m as the passenger car market grew. In Malaysia 59%-owned Cycle & Carriage Bintang benefited from a good trading environment and the recognition of dividend income from Mercedes. In Indonesia, 44% Tunas Ridean increased its contribution as higher income from financing offset weaker automotive profits.

 Other interests comprises two investments. The 25% stake in Siam City Cement acquired in April and the stake in REE Corporation in Vietnam which was increased from 19% to 22% in February.

 Now to Astra, which experienced a 24% reduction in underlying profit for 2015 at IDR14 trillion, equivalent to $1.38b. The wholesale market for cars in Indonesia fell 16% in 2015 while Astra's car sales were 17% lower at 510,000 units leading to a modest decline in market share from 51% to 50%.

 Astra Honda Motors' motorcycle sales declined by only 12% to 4.5m units as the market contracted 18%, increasing its market share from 64% to 69%.

 Net income at Astra Otoparts, the component business fell 63% to $24m due to lower contribution from its manufacturing activities.

 Net income from financial services was 25% lower at $264m. While excluding a prior year acquisition gain, the decline would have been 18%.

 The consumer finance businesses saw financing transactions fall 6% to 4.5b, although there was an improved performance from motorcycle financing. Heavy equipment financing increased 7%. Increases in loan loss provision of 45%-held joint venture Permata Bank offset higher interest income leading to net income being 84% lower at $18m.

 Insurance company, Asuransi Astra Buana, saw net income decline 10% due to lower investment earnings.

 United Tractors' net income declined 28% to $286m. Komatsu heavy equipment sales fell by 40% although parts revenue was up. The contract coal mining interests saw a 9% fall in net revenues with a 4% decline in coal production and 5% in overburden removal. The United Tractors' own coal sales were 18% lower. The lower coal prices and uncertainty as to recovery has led United Tractors to take a $192m impairment charge against the carrying value of its coal mining properties in addition to the $130m provision made in 2014.

 Acset Indonusa, the newly acquired general contractor, which is 50% owned, increased its new contracts during the year to $228m from $52m in 2014.

 Astra Agro Lestari reported net income of 75% lower at $46m, with average crude palm oil prices achieved down 16% and crude palm oil sales down 24%, but olein sales up significantly.

 Net income from infrastructure, logistics and others fell by 17% primarily due to initial losses arising on a new toll road while Astra's information technology interests produced a modest increase in net income.

 Lastly, corporate costs and other interests. These have shown a 10% decrease due to higher income from our investment in Zhongsheng shares and convertible bonds and lower management expenses, partially offset by higher net finance charges due to there being less net cash at the center and a significant level of debt in Jardine Cycle & Carriage for part of the year.

 Thank you very much for your attention.




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