Full Year 2016 Jardine Matheson Holdings Ltd Earnings Presentation

Mar 02, 2017 AM EST
J36.SI - Jardine Matheson Holdings Ltd
Full Year 2016 Jardine Matheson Holdings Ltd Earnings Presentation
Mar 03, 2017 / 03:30AM GMT 

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Corporate Participants
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   *  Ben Keswick
      Jardine Matheson Holdings Limited - MD, Executive Director
   *  John Witt
      Jardine Matheson Holdings Limited - Group Finance Director

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Presentation
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 Ben Keswick,  Jardine Matheson Holdings Limited - MD, Executive Director   [1]
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 Well, good morning, everybody. Thank you for joining us this morning and we're going to be presenting Jardine Matheson 2016, our annual results.

 I'll start by giving you a brief overview of our 2016 performance and then hand over to John Witt, our Group Finance Director, who will provide details of the year's results including those of the individual Group companies.

 Following John, I will provide my views on the outlook for 2017 and we'll be happy to take your questions after that.

 Here, we see the Group companies showing our effective shareholding interest and their contribution to Jardine Matheson and Jardine Strategic profit.

 The largest contributor to underlying profit remains Hongkong Land, Astra and Dairy Farm. Overall for 2016, the Group's revenue, including that of associates and joint ventures, rose 11% to $72.4 billion.

 This increase was due mainly to the higher revenues in a number of associates. In particular, Yonghui Superstores, who showed good growth and had its first full-year contribution to the Group. Otherwise, the Group's total revenue for 2016 was relatively unchanged.

 Moving to earnings. Our underlying pre-tax profit for 2016 grew by 6% to $3.7 billion, while underlying profit was up 2% at $1.39 billion. The profit attributable to shareholders benefited from our $1 billion share of Hongkong Land's property revaluations and came in at $2.5 billion.

 The Board is recommending a final dividend of $1.12 a share which will increase the total dividend for the year by 3% to $1.50 a share.

 Looking at last year, trading conditions remain challenging for most of our businesses. So it was -- pleased to see a number of them producing good performances, allowing Jardine Matheson to report its satisfactory result.

 There were encouraging results in our more mature markets, with commercial property remaining strong in Hong Kong and good performances from retail and motors in Singapore.

 In Indonesia, Astra's automotive businesses outperformed the market as they capitalized on new model launches.

 In 2016, the main contributors to our underlying performance for activities were motor vehicles at 28%, property at 25% and retail and restaurants at 23%. This was broadly in line with 2015, although with motor vehicles now ahead of the contribution from property.

 We've expanded our direct exposure to Mainland China over the past few years in areas such as property, retail and automotives. This has led to an increased contribution to our results from the Mainland and we will see that growth continue.

 The underlying profit split this year was 52% for Greater China and 43% from Southeast Asia, while 5% came from the rest of the world.

 We're fortunate that our primary markets are forecasting significant long-term growth in consumption, particularly from the growing middle class which will play to the strengths of our businesses.

 Total capital investment for the Group, including associates and joint ventures and residential developments, remain strong at $5.7 billion. This was primarily invested in growing our existing businesses and increasing shareholdings in Group companies. John will provide highlights later on these investments.

 At the same time, we continue to look at ways that our businesses can grow and compete as markets evolve and consumer requirements change. And here, I'm referring to initiatives that embrace technology to improve our competitiveness and strengthen our capabilities to enhance the customer experience.

 To illustrate, Dairy Farm continues to seek new ways to be relevant to customers through its digital strategy. Last year, IKEA launched its e-commerce operations for Hong Kong, Macau and Indonesia markets, with Taiwan just launched as well this month.

 Here at the center, it is about finding opportunities and remaining vigilant as the landscape changes. With that in mind, we launched a Group-wide initiative designed to inspire a culture of innovation and seek out new ideas that would change the way we work. We've called it Innovate Jardines.

 This initiative engages our people and challenges them to think about the different forces in play that affect them in their business environment, with a particular emphasis on the rapid development in technology.

 The response from our people has been very positive and I'm optimistic that it will deliver results and play a key role in the process of evolution that many of our operations are already embarking on.

 I'll now pass the podium over to John, who will take us through the 2016 results in more detail. John?

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 John Witt,  Jardine Matheson Holdings Limited - Group Finance Director   [2]
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 Thank you, Ben, and good morning, everyone.

 Before I go through the financial results I should note that my focus will be on underlying profit attributable to shareholders which the Group uses as its key earnings performance measurement.

 Underlying profit excludes what we call non-trading items which are specifically defined by an accounting policy in our accounts. By focusing on underlying profit, the intention is to provide a clear understanding of the ongoing performance of the Group.

 This first slide breaks out the underlying profit contribution from our principal businesses. I will start with some general comments before we look at each of the businesses in greater detail.

 At Jardine Pacific, while results were down 5%, there were good performances coming from a number of its units, namely Jardine Schindler and Jardine Restaurant Group. Jardine Motors' results significantly benefited from profit growth in its Zung Fu business in Mainland China, with an overall 43% increase in its profit contribution.

 Jardine Lloyd Thompson produced a satisfactory result when set against the continuing challenging economic and trading environment. Overall, its contribution reflected a weaker first-half performance and restructuring costs from its employee benefits business in the United Kingdom as well as development costs incurred from its growing specialty business in the United States.

 On Hongkong Land, its contribution was down 6%, principally due to the absence of a gain relating to a redeveloped Hong Kong property recorded in 2015. Excluding this gain, Hongkong Land's contribution for 2016 would have been in line with the previous year.

 Dairy Farm, another key contributor to the Group, increased its contribution by 8% owing to strong performances from Yonghui and Maxim's and also partly due to higher profits in the food and home furnishing divisions.

 For Mandarin Oriental, its contribution fell by 34% due to weaker demand at its key owned hotels, particularly in Hong Kong, in London and in Paris.

 With its 19% increase in contribution, JC&C performed well, largely due to its automotive businesses. Astra also benefited from strong performance in its automotive businesses. However, this was partly offset by Astra's share of the Permata Bank loss which brought Astra's overall contribution to $312 million, an 8% increase from the prior year.

 The main non-trading item was, as usual, the change in the independent valuations of investment properties at Hongkong Land, principally related to its central portfolio here in Hong Kong.

 During 2016, the value of this portfolio increased by 12% to some $26 billion. This was due to office capitalization rates compressing on strong investment demand and rental growth.

 In addition to revaluation gains, we also benefited from the gains on the sale of properties, primarily in Hong Kong and Indonesia. These positive items were offset by asset impairment charges of some $100 million within Jardine Pacific, principally related to its IT distribution business.

 In total non-trading items for 2016 were $1.1 billion compared with $439 million in 2015.

 The Group's balance sheet remains strong. Total equity was $49.7 billion, an increase of 9% from 2015 and shareholders' funds rose by 10% to $21.8 billion.

 Jardine Matheson's consolidated net debt at the end of 2016, excluding financial services companies, was $2.1 billion, which compares to $3 billion at the end of 2015. Gearing in 2016 was 4%.

 The Group also had net borrowings of $3.6 billion in its financial services companies, which comprise primarily the consumer finance businesses within Astra, mainly in respect of motor vehicles, motorcycles and heavy equipment.

 Focusing for a moment on the Group's net debt, excluding financial services, we have broken this down by business unit shown here. Net debt in Jardine Motors reduced in 2016 due to favorable movements in working capital, principally within its Zung Fu business.

 Hongkong Land had $2 billion of net debt at the end of 2016, some $300 million lower than the prior year. This was due to an absence of new large land purchases, resulting in reduced borrowings as operating cash flows remain strong.

 Net debt at Dairy Farm rose to $641 million, with the increase in borrowings arising primarily from the additional investment in Yonghui in August of 2016.

 Mandarin Oriental's net debt rose to $297 million as it drew down on its facilities to fund the investment in its Boston hotel in April 2016.

 Offsetting net borrowings at the Group level, Jardine Cycle & Carriage had cash balances of $91 million at the end of the year; and Astra ended the year with a net cash position of $552 million. This was up from $132 million in 2015 due principally to strong operating cash flows.

 In addition, the three main corporate holding companies were debt free, with cash available for investment. The amount of cash in Jardine Strategic did reduce year on year, primarily due to the repurchase of its own shares.

 The Group continues to benefit from strong operating cash flows, ample committed facilities and access to both the bank and debt capital markets. This provides a strong financial base to continue investing in both our existing and new businesses.

 Turning to our consolidated cash flows. The cash flow from operating activities in the year was $3.95 billion, a slight decrease against the prior year mainly due to Astra requiring an increase of some $500 million for its businesses in the financial services and heavy equipment and mining sectors. Partially offsetting this were Jardine Motors and Hongkong Land, who both had reduced working capital by the end of 2016 as we saw previously.

 Our capital expenditure, including investments for the year by our subsidiaries, amounted to some $2.6 billion.

 This slide summarizes all our capital investment across the Group in 2016, including major CapEx in associates and joint ventures. Starting with the $2.6 billion of capital expenditure directly in our subsidiaries, this was primarily in three categories.

 Some $650 million of investments in existing associates and joint ventures were primarily driven by Dairy Farm's further $190 million investment in Yonghui Superstores and Astra's participation in Permata Bank's rights issue and equity loan for a total of $240 million.

 Close to $1 billion related to purchases of tangible assets across the Group, of which half was within the Astra businesses. And some $300 million was for additions to investment property, primarily in Hongkong Land and Astra, principally reflecting ongoing CapEx at Hongkong Land's Wangfujing project and in respect of Menara Astra, Astra's new Grade A office building.

 In addition to this $2.6 billion investment within the Group's subsidiaries, the Group also spent $362 million purchasing additional shares in Group companies.

 The next line, trading properties CapEx of $397 million is expenditure on properties for sale. These are predominantly the residential projects of Hongkong Land which, in the cash flow statement, appear under operating activities rather than investing activities as such.

 Finally, there was $2.3 billion of capital expenditure within our associates and joint ventures, which are outside the Group's consolidated cash flow statement.

 In total then, the capital expenditure and investments across the Group was some $5.7 billion in 2016. This compares with $6.5 billion in 2015.

 Returning to the consolidated cash flow. The Group had cash inflows of $531 million from property disposals and repayments of advances from associates and joint ventures.

 Under financing activities, there were net outflows of some $1.1 billion. The main items were the dividends paid to shareholders of the various Group companies and the purchase of additional shares in Group companies, as I mentioned earlier.

 Overall, the Group had a net increase in cash of $836 million for a year-end cash position of $5.5 billion.

 Let me now cover each of our principal businesses. As I mentioned earlier, Jardine Pacific's results were 5% lower in 2016, which reflects the absence of profits from its shipping business which was disposed in 2015. Excluding this, Jardine Pacific results would have increased by some 5%.

 Jardine Schindler produced another set of strong results and remains the largest profit contributor to Jardine Pacific, with a contribution of $44 million in 2016, 7% up.

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

 At Gammon, there was underperformance in a contract in its civils division causing its contribution to the Group to fall by 38% to $18 million. However, Gammon's order book remains strong at $3.8 billion.

 Jardine Restaurant Group had a good year overall with stronger performances in our Pizza Hut businesses in Taiwan and Vietnam, partly offset by lower restaurant sales in Hong Kong.

 Results were also enhanced by a tax benefit in Taiwan following a restructuring of the business there.

 Transport Services was down 47% overall, due to the loss of Jardine Shipping, as I mentioned earlier. Excluding this loss of Jardine Shipping from 2015's result, Transport Services was down 10% in 2016.

 JTH continues to make encouraging profit improvements following the streamlining of its businesses.

 Jardine Motors produced a strong profit of $110, up 43%. As you can see, the profits from China, which includes Hong Kong and Macau, more than doubled from 2015. This was due to the Zung Fu business in Mainland China which had higher sales of Mercedes-Benz passenger cars at improved margins and better performances from its aftersales operations.

 The market in Hong Kong was softer in 2016 due to reduced overall demand, with the overall passenger car market down 18% and the high-end market down 26% year on year. Despite these tough trading conditions, Zung Fu gained market share.

 Looking forward, Zung Fu is investing in a new flagship center on Hong Kong Island that will combine sales, service and administrative activities onto a single site. This flagship center will be financed by proceeds from the disposal of some of its legacy properties in Hong Kong.

 In the United Kingdom, our dealership saw higher sales and stable margins, but a weaker sterling exchange rate led to a lower contribution to the Group.

 In passing, I will note that Zhongsheng, one of Mainland China's leading dealership groups in which Jardine Strategic now holds a 15.5% interest, also performed well although the Group's results did not benefit from this as the minority investment is not subject to equity accounting.

 Jardine Lloyd Thompson's total revenue for 2016 was GBP1.3 billion, an increase of 9% in its reporting currency. The underlying trading profit was up 3% in its reporting currency but down 9% at constant rates of exchange. This reflects a weaker first-half performance in its UK employee benefits business and the development costs of its US specialty business. However, good performances were seen in Latin America and Asia.

 JLT's own results benefited from the lower value of pound sterling in the second half of last year; however, this benefit was largely reversed on conversion into US dollars at the Group level.

 After adjusting for costs in relation to the restructuring of its UK employee benefits business, JLT's contribution to the Group's underlying profit was 20% lower.

 This completes my review of the businesses held directly under Jardine Matheson.

 I will now turn to Jardine Strategic, whose underlying profit at $1.4 billion was marginally above its 2015 level, with earnings per share at $2.45. This was some 3% higher than the prior year, as Jardine Strategic repurchased and canceled some 5.7 million shares at a total cost of $168 million.

 Its profit attributable to shareholders was $2.7 billion in 2016, against $2 billion in 2015, largely due to an increase in the value of Hongkong Land's investment portfolio.

 The Board is recommending a final dividend of $0.20 per share for 2016, providing an anticipated total dividend of $0.30 per share, an increase of 5% over 2015.

 The net asset value per share shown for Jardine Strategic is calculated by reference to the market value of the underlying investments held by Jardine Strategic. And at December 31, 2016, this was up 7% to $53.25 per share.

 Moving to the main listed companies under Jardine Strategic. At Hongkong Land, the underlying profit was $848 million, down 6%. Results from its commercial portfolio remain strong, although earnings from the residential sector were marginally lower. Its overall contribution to the Group declined in the absence of a gain recorded in 2015 on a redeveloped property in Hong Kong.

 In its commercial property, the limited competitive supply in Hong Kong's office leasing market benefited the group's Central portfolio. Its retail portfolio in Central was fully occupied. Base rental reversions were largely positive, but lower turnover rent led to reduced rental income. In Singapore, the group's office portfolio was almost fully let but average rents were slightly down.

 In residential property, Hongkong Land's developments in Mainland China had 34% higher revenues. However, lower margins, due to a different product mix combined with a weaker Chinese currency, meant the residential contribution to total profit was flat year on year. In Singapore, results were marginally lower on the back of decreased provision write-backs on completed developments.

 In terms of the balance sheet, the 9% increases in equity and net asset value reflect the valuations performed by independent valuers at the year-end, principally relating to Hongkong Land's Central portfolio.

 Dairy Farm produced good growth in the face of challenging markets. Revenue from subsidiaries in 2016 was up 1% at $11.2 billion. Total revenue, including 100% of associates and joint ventures, was 14% higher at $20.4 billion, with Yonghui producing stronger growth and this being Yonghui's first full year of contribution. The 2015 results included eight months of Yonghui.

 Dairy Farm's underlying profit was up 7% at $460 million, with the increase being largely attributable to improved operating margins in its food and home furnishings divisions, and stronger contributions from Yonghui and Maxim's.

 Breaking it down, the food division saw a relatively stable Hong Kong and a recovery in Singapore, to give a 13% growth in its operating profit.

 Health and beauty saw revenue grow in most of its markets. Operating profits declined by 5% in the face of somewhat lower margins and higher rents.

 The home furnishings division saw good growth, with revenues up and operating profits growing 11%. Taiwan produced a strong performance, and our single store in Indonesia continues to progress well.

 Mandarin Oriental faced a soft demand in many of its key markets, bringing its underlying profit down to $57 million, a decrease of 37%. Hotels in Hong Kong, London and Paris were particularly affected by weaker demand, with the London hotel further impacted by the 18-month renovation program that commenced in September last year.

 Elsewhere, the group experienced stronger demand in Tokyo. Operations in Munich continued and returned to normal levels following renovations, and the group's results benefited from the addition of the hotel in Boston, acquired in April 2016.

 The increase in the fair market value of Mandarin Oriental's freehold and leasehold land and buildings in 2016 saw its adjusted NAV rise 9% to $3.10 per share.

 Now moving to our Singapore-based company, Jardine Cycle & Carriage, which had underlying profits of $679 million in 2016, a 7% increase from the prior year.

 In order of sequence, Astra's contribution was $500 million, up 6% from 2015, with the average rupee exchange rate remaining stable in 2016 compared with 2015.

 The contribution from JC&C's direct motor interest was up 8% (sic - see slide 20, "18%") at $167 million. Within the direct motor interests, 25% of THACO in Vietnam enjoyed another good year, with its contribution up 10% at $94 million, on the back of strong performance in its automotive operations.

 Earnings from the holding on Singapore motor operations rose 26% to $49 million, as the passenger car market grew. In Indonesia, 44%-owned Tunas Ridean had excellent results, with its contribution rising by 94% to $18 million, with higher income from motor car sales and financings.

 The contribution from other interests was up by 11% at $33 million. Other interests comprise two investments: a 25% stake in Siam City Cement and a 23% stake in REE, Refrigeration Electrical Engineering Corporation in Vietnam.

 Siam City Cement's first full-year contribution was only marginally higher than the prior year, with reduced domestic prices partly offset the contribution from new acquisitions. Siam City Cement is embarking on an expansion drive, investing some $1 billion on new acquisitions in Vietnam, Bangladesh and Sri Lanka.

 REE had a 25% increase in its contribution to $11 million, mainly from its property development activities.

 I should note that in 2015, corporate costs benefited from a foreign exchange gain of some $10 million relating to the Group's acquisition in Siam City Cement. Adjusting for this, corporate costs only rose modestly.

 Turning to Astra. In more detail, Astra had a good year overall, with an improved total net profit of $1.1 billion, which translates to a $500 million contribution to JC&C.

 In 2016, the year saw a very strong performance from the automotive businesses, which together produced a 27% higher profit. Car sales were up by 16%, outperforming the wholesale market increase of 5%, after its combined market share rose from 50% to 56%.

 For motorcycles, sales decreased 2%; however, as the overall market decreased 8%, Astra Honda's market share increased from 69% to 74%.

 Net income from financial services was 78% lower, at $59 million, due to the loss at Permata Bank which had significantly increased loan loss provisions primarily in its commercial loan book.

 Steps to strengthen Permata Bank's capital base have been taken by Astra and Standard Chartered Bank, who each hold a 44.6% interest in the Bank.

 Earnings from Astra's consumer financing and heavy equipment financing businesses rose 21% and 20% respectively, while a modest overall improvement was seen in Astra's general insurance company and in its life insurance joint venture, Astra Aviva Life.

 The heavy equipment and mining businesses had a tough year, with coal prices only recovering towards the end of 2016. At United Tractors, net income was some 30% higher, although in 2015 there was an impairment charge relating to the carrying value of its coal mining properties. Excluding this, 2016's net income would have been down some 22%.

 The agri business contribution more than trebled in 2016 to $60 million. At Astra Agro Lestari, results benefited from higher crude palm oil prices despite lower production due to poor weather, and the company also benefited from a stronger rupiah at the year-end compared with December 31, 2015.

 Astra continues to expand its toll road interests, although it will take a number of years before some of these new developments produce a meaningful contribution to profits. Overall, the infrastructure and logistics contribution increased by 53%.

 Within Astra's new property division, construction is well underway at the 93% sold luxury residential development, a 60% owned joint venture with Hongkong Land, and at Menara Astra, the adjacent Grade A office tower. Both developments are in Jakarta's central business district and are on schedule to complete in 2018.

 In conclusion, the 2016 trading performance of the Group's operations was sound, with a modest overall increase in profits despite the mixed economic backdrop.

 This growth, however, was tempered by the Group's share of the loss in Permata Bank. Without this loss, the Group's underlying earnings growth would have been higher at 7%.

 Overall, the Group remains well financed with low levels of net debt and good liquidity and is well positioned for future growth.

 Thank you. I will now hand the podium back to Ben.

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 Ben Keswick,  Jardine Matheson Holdings Limited - MD, Executive Director   [3]
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 Thank you, John. Looking forward to the future, we will continue to drive growth by strengthening our leading positions in our established markets, and by taking the opportunities to expand our presence.

 Each of our businesses has an active growth strategy for which we can call upon the full support of the Group's resources. We will also be seeking out synergies across our businesses, where we believe that shared expertise and the increased use of tools being made available by the digital world will reduce costs, enhance customer experience and seek out new business opportunities.

 Our focus will remain on Greater China and Southeast Asia, where increasing wealth and growing middle class population that I mentioned at the start will have a positive impact on our businesses.

 A recent report has forecast, based on 2011 US dollar purchasing parity, our Asian consumers, so excluding India and Japan, had $8 trillion of consumption in 2015.

 This is forecast to increase by some 50% to over $12 trillion by 2020. And by this time, China is forecast to be the largest middle-class nation in the world.

 One of our key strengths is people, and through initiatives such as Innovate Jardines, which I mentioned earlier, we are tapping into this strength. We're engaging with our people on the need to understand that technology is changing the business landscape, and to learn how to take advantage of that.

 The quality of our businesses, our financial resources, our extensive customer bases and, importantly, the resourcefulness of our people will enable us to capitalize on these opportunities that these changes bring.

 In 2017, we will see continued investment for future profit growth in markets that remain challenging. This investment will be both in our corporate infrastructure and assets and, importantly, in our people, to facilitate their development, to take our operations forward in this changing world.

 With that, we've come to the end of our presentation. Thank you very much.




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