• Jardine Matheson’s 1H20 underlying net profit was below expectations at 24% of our full-year estimate and 27% of consensus’s.
• The group expects the short-term outlook to be challenging given the COVID-19 outbreak but notes some signs of business recovery.
• Even so, we upgrade Jardine Matheson from Hold to ADD as some of the earnings uncertainty has been priced in.

Jardine Matheson's 1H20 Underlying Net Profit Below Expectations

• Jardine Matheson (SGX:J36)'s 1H20 underlying net profit came in below expectations at 24% of our full-year estimate and 27% of consensus’s. Underlying net profit fell 49% y-o-y to US$373m due to the impact of the COVID-19 pandemic.
• Factoring in the decrease in fair value of investment properties of US$1.2bn, Jardine Matheson reported a net loss of US$775m.
• The group maintained its interim DPS of US$0.44, flat y-o-y.
• The three main contributors to underlying net profit were Hongkong Land (SGX:H78) (40%), Astra (29%) and Dairy Farm (SGX:D01) (18%). Mandarin Oriental (SGX:M04) reported a loss of US$67m.
• Net gearing at end-1H20 was 0.09x.

Hongkong Land

• Hongkong Land (SGX:H78)'s office portfolio in Hong Kong remained resilient with 5% vacancy at the end of 1H20 compared to 2.9% at the end of FY19. In Singapore, rental reversions remained positive in the group’s office portfolio in 1H20 and 1.5% vacancy at the end of 1H20 compared with 5% at the end of FY19.

Astra

• Excluding the gain on the disposal of its investment in Permata Bank, Astra’s net profit fell 44% y-o-y in Indonesian rupiah mainly due to significantly lower contributions from its automotive, financial services and heavy equipment and mining businesses.

Dairy Farm

• Dairy Farm (SGX:D01)'s sales fell 9% y-o-y while underlying profit was down 40% y-o-y. In Health and Beauty, performance in North Asia was materially affected by a continuing lack of overseas tourist customers in Hong Kong. The Southeast Asia business performed well in the first quarter but was subsequently impacted by social distancing measures.

Upgrade Jardine Matheson From Hold to ADD

• Our FY20-22F earnings cuts reflect the downward revisions for its operating subsidiaries given the uncertainties from the COVID-19 outbreak. Our Target Price for Jardine Matheson falls to US$48.61 (still based on 0.78x FY20F P/BV which is 0.5 s.d. below its historical 20-year average P/BV).
• Given that some of the earnings uncertainty has been priced in, we upgrade Jardine Matheson from Hold to ADD.
• Key upside/downside risks are COVID-19 impact on economic conditions in Greater China and Southeast Asia.

Source: CGS-CIMB Research - 31 Jul 2020