Thoughts on Jardine Matheson

I wanted to update readers with some brief thoughts on Jardine Matheson and how the risk/reward has shifted with the rising share price.

Lincoln Pan on Bloomberg

I encourage you to watch this short interview with Jardine’s new CEO Lincoln Pan (shared recently by Mike Fritzell), the implications of which have been growing on me and I hope are useful to others. He made a number of comments I found quite surprising and have me a little wary of my position.

Firstly, when asked about the holding structure and capital allocation, Pan referred to buying out minority owners of Mandarin Oriental as an example of the company improving efficiency. No problem with that. Buying out an undervalued subsidiary makes great sense, but after praising the prospects and transformation at Mandarin he followed with, “It was absolutely wrong to have that business in the public domain” and after mapping out a path to earnings growth added, “It would never be able to do that under a public ownership”.

Well… why not??? The strategy-shift towards an asset-lite structure was already well communicated and advanced. Keep improving the business and the market will reward you over time. To believe that only with private fairy-dust applied could Mandarin do what it was already doing and achieve credit for it is a PE bro fantasy.

When asked about the asset mix and whether new capital would be allocated towards newer economy businesses Pan replied, “David if you and I wanted to start a new investment firm today and we just had money we would be looking at AI data centres because those are clear growth drivers in Asia”. Absolute pro-cyclical nonsense. This sort of buzz-word repeating makes me concerned an overpriced, new-economy acquisition is a real possibility.

I wonder if there were any CEO candidates who simply said they would buy back as many shares as possible?

The interview carried a general emphasis of activity and change, with references to the old economy and China/HK heavy portfolio and criticising conglomerates for their “sleepy capital” and pointing to “day to day evaluations” of asset returns and that “we should do everything we should, every quarter that we can” as the way to show the market the company is no longer a boring holding company.

I was among the most excited shareholders at the announcement of Pan to the CEO role, but this just seems frenzied. Trying to turn the company into KKR in short order could be a recipe for over-paying for fads and chaos.

Dom St George on Yet Another Value Podcast

I also recently came across a discussion of Jardine Matheson on YAVP that I would encourage a watch of, as Dom (of Cayucos Capital) is highly knowlegeable about the company. Unfortunately, the host spent a chunk of the interview pushing an angle that shows the wrong way to think about the company’s valuation, in my view.

I love a good NAV discount as much as the next value wannabe, but the assumption that the company isn’t compelling because it only at a 16% NAV discount completely latches onto an obvious, but irrelevant number. The comparison to Exor was straight-out wrong as Exor is a collection of fairly priced businesses (with Ferrari possibly egregiously overpriced), whereas Jardine (or First Pacific/ CK Hutchison/ Tianjin Development etc.) is a double discount on top of already out-of-favour and cheap assets.

The right approach to value Jardine and the best way to common-sense check a NAV discount is simply to look at underlying earnings. There’s no need to argue about discount rates at Hongkong Land etc, just look at the earnings produced by the holdco. When I entered in 2023 at $42, Jardine was at 7.5x trailing eps. At the time of this podcast, the company was at 11x and still arguably under-earning due to cyclical factors at HKL and DFI- a very defensible valuation in my view.

Today the shares have advanced to $76 or 13.5x trailing (with 2025 earnings due soon and likely steady).

Summing up

I realise on the one hand I’m sounding alarmed, while defending the company as cheap on the other, but both points reflect the evolution of price and value and a shift in my outlook.

Upon purchasing Jardine, I thought 7.5x was too cheap and figured I could do well if the company grew roughly with GDP, kept up its decent dividend and eventually re-rated to 15x. I never intended to hold forever and treated it as a deep value investment.

For a brief time, I was hopeful Lincoln Pan could transform the company into a compounding capital machine. Continue to simplify the structure, take subsidiaries private where possible and buy back as many shares as the balance sheet would allow at both the holdco and operating levels.

Pan’s comments, along with those of CFO Graham Baker at the half-year results, indicate that isn’t the plan. They will be chasing growth and looking to diversify their earnings streams. I hope like hell they’re not about to plough capital into data centres, but we’ll see.

So it’s back to plan A. My current target is 15-16x earnings ($84-90 per share) and onto the next one. Though I will monitor events keenly between now and then.

I know there are a number of Jardine owners in my readership and I’d love to hear your thoughts.

Thanks for reading,

Guy

I own shares in Jardine Matheson. As always, this isn’t investment advice. Please do your own due diligence and seek professional advice if you’re unsure about your finances.