Interim 2016 Jardine Matheson Holdings Ltd Earnings Presentation

Jul 31, 2016 AM EDT
J36.SI - Jardine Matheson Holdings Ltd
Interim 2016 Jardine Matheson Holdings Ltd Earnings Presentation
Aug 01, 2016 / 01:00AM GMT 

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Corporate Participants
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   *  John Witt
      Jardine Matheson Holdings Ltd. - Group Finance Director

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Presentation
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 John Witt,  Jardine Matheson Holdings Ltd. - Group Finance Director   [1]
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 Good morning, everyone, and welcome to the Jardine Matheson and Jardine Strategic 2016 Half-Year Results Presentation. I'm John Witt, the Group Finance Director, and this morning I will give you an overview of the Group's results for the first half of 2016, including those of its principal operating units. There'll be time at the end to answer any questions you may have.

 Let me start with this slide, which sets out the structure of the Jardine Matheson Group with which most of you will be familiar. In addition to the ownership interest shown here, Jardine Strategic, of course, holds a 57% interest in its parent, Jardine Matheson. There are a couple of definitional points before I turn to the results. The Group uses underlying profit attributable to shareholders or underlying profit as its key measure of earnings performance. This measure excludes non-trading items, which are defined in Note 7 of the summary financial statements on a consistent basis to that used in the previous years. Non-trading items are set out separately in order to provide a clear understanding of the business performance of the Group. You should also note that all dollar figures mentioned will be US dollars, unless I indicate otherwise.

 Generally, during the first half of the year, the Group's businesses have continued to face challenging market conditions; yet despite this, we've seen creditable performances from many of them. Overall, Jardine Matheson's revenues together with 100% of the revenue from its associates and joint ventures, was $34.6 billion, 10% up on the first half of 2015. The increase was principally due to the inclusion of new associates for the full period. These were Yonghui in Dairy Farm and Siam City Cement in Jardine Cycle & Carriage, in which we invested in April last year.

 Consolidated revenue for the Group was down 4% at $18 billion. The Group's underlying profit for the first six months of 2016 was $636 million, 4% lower from the same period in 2015. Non-trading items in the period produced a net gain of $348 million, primarily due to the revaluations of investment properties. This compares with a net non-trading gain of $42 million in the first half of 2015. Underlying earnings per share were 5% lower at $1.70. The Board has maintained the interim dividend at $0.38 per share.

 The improved net asset value of $55.29 per share shown here is based on the book value of the Group's consolidated net assets attributable to its shareholders, prepared in accordance with International Accounting Standards. This differs from the method used by Jardine Strategic, which I will come to in a few minutes.

 Turning to the contribution of individual businesses to Jardine Matheson's profit, as I mentioned, challenging markets affected a number of our operations in the first half. The performance from Hongkong Land was solid, despite the contribution from residential developments being down. JLT and Mandarin Oriental saw declines. Within Astra, reduced profits from a number of businesses were only partly offset by generally improved performances in its automotive activities. There were improved results from Jardine Motors, Dairy Farm and Jardine Cycle & Carriage excluding Astra.

 Moving to non-trading items, during the period, the major component was an upward revaluation of Hongkong Land's investment portfolio, which resulted in a $363 million gain at the Jardine Matheson level.

 I'll now turn to the individual operating businesses before returning to the net debt position and outlook for the second half. I will deal with the non-listed Jardine Pacific and Jardine Motors first before moving on to the listed entities, which issued their individual results announcements last week, where additional details can be found as required.

 Starting with the businesses held directly by Jardine Matheson, Jardine Pacific's operations produced some solid performances. Its underlying profit was $54 million, which was modestly lower than last year, due to the sale of its shipping business in 2015. Excluding this, overall profits were steady on its individual businesses. Jardine Schindler was the biggest contributor to Jardine Pacific as firm margins enabled it to maintain a stable contribution. Its order intake was steady in an increasingly competitive market and the business is set to benefit from the timing of certain projects in the second half of the year.

 JEC performed well in its core Hong Kong operations and in its joint ventures with Trane. While certain units are facing challenges, overall order book is strong.

 Project timings meant that Gammon's earnings were down 26% to $8 million. Gammon ended the first half with a strong order book at $4.1 billion compared with $3.5 billion at the end of last year. New contracts including large residential developments in Tseung Kwan O and the TaiKoo Place Somerset redevelopment in Quarry Bay.

 Jardine Restaurants' results were up 46%, mainly due to improved performances from KFC in Taiwan and Pizza Hut in Vietnam with turnaround efforts in both operations gaining momentum. The contribution from Pizza Hut was higher in Taiwan but lower in Hong Kong in a more challenging trading environment.

 Earnings from Transport Services fell by 50% during the period, reflecting the absence of a contribution from the shipping business following its sale in 2015.

 JTH Group's technology support businesses produced improved performances from their repositioning towards value-added products and services.

 Let's move on to our Motors business. Jardine Motors produced a strong growth with its underlying profit up 50% at $49 million for the period. This was mainly due to Zung Fu's good performance in Mainland China, which saw higher deliveries of Mercedes-Benz passenger cars and improving margins. There was also strong growth in the after-sales business. Hong Kong and Macau proved to be more difficult, with declining vehicle sales and reduced margins. However, the second half should benefit from the delivery of the new E-Class, which is scheduled for September. In the United Kingdom, the contribution from trading was in line with last year, despite sterling being weaker, and there was a further gain recorded on the sale of a dealership.

 In addition to Jardine Motors, you'll recall that Jardine Strategic has an 11% equity interest in Zhongsheng, together with convertible bonds. Zhongsheng is one of Mainland China's leading dealership groups. This business has seen an increase in new car sales volumes and a higher contribution from after-sales. Development-wise, in April of this year, Zhongsheng added 18 dealership stores in its network through the acquisition of a 65% stake in Jiahua Weiye. Zhongsheng remains well placed as the overall market continues to consolidate.

 Looking now at Jardine Lloyd Thompson, which I will refer to in sterling, the currency in which it reports, JLT saw a decline in its trading profit as an improved performance in Risk and Insurance was offset by a lower contribution from employee benefits. Its total revenue for the period was GBP619 million, an increase of 5%. Its underlying trading profit decreased by 4% to GBP98 million. In part, this reflects the ongoing investment in building out its US specialty business. JLT's Risk and Insurance businesses produced an 8% increase in revenues with good performances seen in its Specialty and Reinsurance businesses, as well as out of its businesses in Asia and Latin America.

 JLT's client wins are encouraging, and it is seeing significant financial benefits from collaboration between its specialty operations around the world. However, the employee benefits operations saw revenues decline 5%, as the UK business has restructured in response to industry changes. JLT's contribution to the Group was 27% lower, after aligning the accounting treatment of the restructuring costs in the employee benefits business to that of the Group and reflecting the weaker sterling exchange rate. This completes my review of the businesses held directly under Jardine Matheson.

 Now, turning to Jardine Strategic, one of the Group's core holding companies, its consolidated underlying profit in the first half of the year was $664 million, a decrease of 5% to the same period in 2015. The non-trading items totaling $424 million also reflect the upward revaluation of Hongkong Land's investment portfolio. The Board has approved an interim dividend of $0.09 per share, an increase of 6% from last year and in line with the increase provided over the past few years.

 Reflecting the nature of its businesses, Jardine Strategic's NAV per share is calculated on market value basis, details of which are provided in note 15 of the announcement. As a result, it is not directly comparable to the Jardine Matheson NAV, which I mentioned earlier, is calculated based on IFRS. The intention here is to provide users with the mark-to-market value of Jardine Strategic's underlying investments as at the half year. As of June 30, the net asset value per share was $55.46, up 11% from December 31, 2015.

 Now I'll turn to the principal businesses of Jardine Strategic. Hongkong Land again showed resilience, with its commercial portfolio remaining stable with the benefit of firm rental levels. In the residential sector, while its key markets in Mainland China are performing well, it did not have any completions in Singapore during the period. Overall, its underlying profit during the first half of the year was 6% lower than 2015 at $393 million. Its non-trading items of $870 million reflect, as noted earlier, the impact of June revaluations of the investment properties.

 In Hong Kong, office vacancy in the Group's Central Office portfolio improved modestly to 3.1% at the end of June. Office rental reversions were positive. In its Central Retail portfolio, full occupancy was maintained, and base rental reversions continue to be positive, although the average retail rent received declined due to lower turnover elements. In Singapore, vacancy was just 1% compared with 3% at the end of 2015, as pre-committed space was taken up.

 Turning to developments, Wangfujing, Hongkong Land's luxury retail complex in Beijing, is scheduled to open in the first half of 2017. In Jakarta, work on the fifth tower at the Group's 50%-owned joint venture, Jakarta Land, is continuing on schedule, with completion scheduled for 2018.

 On the residential property front, Hongkong Land's projects in Mainland China continue to perform well. At June 30, the Group had $885 million in contracted sales that had yet to be recognized, up from $821 million at the end of 2015. In Singapore, there were no residential projects completed in the first half of 2016 compared with two projects completed in the first half of 2015. One fully pre-sold project is scheduled for completion in the second half of this year. Pre-sales continue at two further projects, which are due to complete in 2017 and 2018.

 Of the Group's other residential developments, good progress is being made at two joint venture projects in Indonesia and a further two joint venture projects in the Philippines. During the second half of the year, while the performance from Hongkong Land's commercial portfolio is expected to remain stable, earnings from its residential business are likely to be lower as an improved contribution from Mainland China will be more than offset by lower contributions elsewhere.

 Dairy Farm: Dairy Farm performed satisfactorily in the first half with modest sales growth at constant rates of exchange in all its divisions. Underlying profit improved despite tough trading conditions, as higher contributions from Food, Home Furnishings, Restaurants and Yonghui offset a weaker performance from its Health and Beauty business. And while cost challenges remain, there are some signs that margin pressures are easing. Consolidated sales for the period, excluding associates and joint ventures, declined 1%, although were up 2% at constant rates of exchange.

 Sales were affected by the closure of a number of underperforming stores in Singapore and Indonesia. Underlying net profit at $199 million was 3% above the same period last year, or up 5% at constant rates of exchange. The result also benefited from a full half-year's contribution from Yonghui compared to three months in 2015.

 In the Food division, sales within supermarkets and hypermarkets were up 2% at constant exchange rates, despite deflationary pressures. The convenience store operations generally performed satisfactorily in a difficult trading environment. Progress continues to be made in Mainland China in developing the business.

 Overall, the Health and Beauty division saw modest sales growth; however, profitability declined with reduced results from Hong Kong, Malaysia and Macau. In Home Furnishings, IKEA performed well and produced growth in both sales and profits in all three of its markets. The Group is pursuing store expansion opportunities in all of its territories.

 In the Restaurant division, Maxim's maintained its consistent track record of expansion and performance. In April, Maxim's completed the acquisition of the Cova patisserie and restaurant franchise in Hong Kong, which operates in 10 locations.

 Dairy Farm is shortly to invest a further $191 million in Yonghui to maintain its 19.99% interest following the placement by Yonghui of a 10% shareholding to JD.com. Yonghui reported a strong 18% growth in the first half. Dairy Farm continues to take the steps needed to enhance the competitive positions of its businesses. Improvements are being made to existing stores to enhance the shopping experience for customers. Its private label range is being expanded to offer consumers a choice of high-quality products at lower prices, and greater efficiencies in productivity is being achieved through investments in information systems and supply chain infrastructure. While the second quarter trading was stronger, trading conditions remain uncertain.

 Mandarin Oriental also faced challenging conditions in a number of its key markets in the first half of the year, resulting in lower earnings for the period. Its underlying profit was $25 million compared with $33 million in the same period in 2015. Hong Kong, London and Paris in particular were affected, and there was also an adverse impact of a rooms renovation program in Washington DC. The Group did, however, benefit from a positive trading environment in Tokyo and a return to normal operations in Munich, following a public area renovation. The results also benefited from a profit contribution from Mandarin Oriental, Boston, following its acquisition in April of the hotel property, which the Group has managed since the hotel opened. The previously announced 18-month renovation of Mandarin Oriental Hyde Park, London, is scheduled to begin in September this year. The hotel work will be undertaken in two phases that will allow it to remain open during the renovation period.

 Mandarin Oriental has a strong pipeline of hotels and residences under development, with the next opening in Doha in the first half of 2017. It has also recently announced that it will brand and manage a portfolio of luxury residences adjacent to Mandarin Oriental, Bali, that are scheduled to open at the same time as the hotel in mid-2018. The current challenging conditions are expected to continue to impact Mandarin Oriental during the second half of the year. Nevertheless, it will continue to benefit from a strong competitive position and balance sheet.

 Turning now to the Group's other business interests in Southeast Asia, Jardine Cycle & Carriage's overall result was lower due to reduced earnings in Astra, coupled with a softer rupiah exchange rate on consolidation. Its directly held motor operations produced good profit growth, and it recorded a full six-month contribution from its associate, Siam City Cement. Jardine Cycle & Carriage reported an underlying profit of $332 million, down 8%, with Astra's contribution 15% lower at $249 million, while the contribution from its direct motor interests was up 13% at $78 million, and other interests up 29% at $15 million.

 Before moving to Astra, let me cover Jardine Cycle & Carriage's directly held motor and other interests. In its direct motor interests, earnings at the Singapore motor operations and at Tunas Ridean in Indonesia improved. While in Malaysia, Cycle & Carriage Bintang's contribution was slightly lower due to a weaker exchange rate. In Vietnam, Truong Hai Auto Corporation continued its remarkable growth story, increasing its market share from 36% to 41%, although margins suffered from competitive pressures.

 The contribution from Jardine Cycle & Carriage other interests, comprising associates' 24.9% held Siam City Cement in Thailand and 22% held Refrigeration Electrical Engineering in Vietnam was up, mainly due to the incorporation of the six months results from Siam City Cement compared to three months in 2015.

 Looking now at Astra, it achieved higher automotive profits that benefited from new model launches, but weak commodity prices adversely affected its heavy equipment, mining contracting and agribusiness operations, and a significant increase in loan-loss provisions of Permata Bank led to a lower contribution from financial services. Accordingly, Astra reported a net profit equivalent to $530 million under Indonesian accounting standards, 12% down in rupiah terms, with a contribution to JC&C 15% lower at $249 million upon consolidation into the stronger US dollar compared with the first half of 2015. Rights issues were successfully completed by three of Astra's businesses during the period to strengthen their capital bases; namely a $300 million rights issue in Astra Agro Lestari, a $400 million rights issue in Permata Bank, and a $40 million rights issue in Acset Indonusa.

 Turning to the contribution from Astra's different businesses, the contribution for the automotive businesses was up 11% at $136 million, as they benefited from new model launches and performed well with increased market share. Toyota and Daihatsu now have a combined 51% of the wholesale car market in Indonesia, up from 50%; while in respect to two wheelers, Astra Honda Motor has increased its market share from 67% to 73%.

 The contribution from the Group's financial services businesses was down 42% at $47 million. Higher earnings at Federal International Finance and Toyota-Astra Financial Services were more than offset by a decline in the contribution from the Group's other financial services businesses. This was primarily due to a net loss of $62 million at Permata Bank compared to a net income of $64 million in the previous year, which followed an increase in loan loss provisions as non-performing loans rose to 4.6% from 2.7% at the end of 2015.

 Astra's general insurance company, Asuransi Astra Buana, saw its net income decline 17%, primarily due to lower investment earnings. Growth was seen at Astra's life insurance joint venture with Aviva plc, which was supported by a healthy increase in individual life customers and participants in its corporate employee benefits programs.

 The contribution from the Group's heavy equipment and mining businesses was down 47% to $42 million. At 60% owned United Tractors, its construction machinery business Komatsu saw heavy equipment sales fall by 25% to 1,036 units, while the parts and service revenues also declined. The contract mining operations of Pamapersada Nusantara reported a 22% decrease in revenue. However, United Tractors' mining subsidiaries reported 58% higher coal sales at 4.5 million tonnes. General construction contractor, Acset Indonusa, just over 50% held by United Tractors, reported an improvement in net income with new contracts of $178 million in the first half.

 Turning to the Agro business, Astra Agro Lestari, which is 80% owned, reported a lower trading profit with reduced sales and palm oil prices. However, its contribution to JC&C was up 74% to $24 million, due to the effect of the strong rupiah on the translation of its US dollar monetary liabilities. The contribution from infrastructure, logistics and others increased to $5 million, mainly due to higher earnings from its toll roads, used vehicles and logistics businesses. The expansion of Astra's toll road interest continues, and they amount now to some 227 kilometers, including sections planned or under development.

 Looking ahead, the first-half challenges of soft commodity prices, weak heavy equipment demand, declines in mining contracting volumes and increases in non-performing loans of Permata Bank are likely to persist for the remainder of the year. Nevertheless, steady performances are expected from the consumer finance and automotive businesses.

 Moving from the operating companies to the Group's net debt position, we see gearing of 6% based on total equity, which is largely in line with last year. This is based on net debt, excluding financial services, at $3 billion. As I mentioned at the start, during the first half of 2016, the Group's businesses have faced challenging market conditions, yet despite this we've seen creditable performances from many of them. They have continued to build on their strong market shares, while delivering sound profits.

 Looking ahead, while we anticipate the current trading environment will persist, we remain confident that the recent steady performances will be maintained in the second half and we can look forward to a satisfactory result for the full year. This concludes the formal part of my presentation. Thank you very much and we'll see you in a few months' time.




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