• We believe Jardine Matheson's share price has priced in short-term recovery expectations.
• 4Q20F performance remains weak and the road to recovery will be slow and long.
• Hence, we downgrade our call for Jardine Matheson to HOLD from Add previously.

Sequential Improvement in Business

• In its 3Q20 business update (no financial details were provided) on 5 Nov 2020, Jardine Matheson (SGX:J36) guided that there was some improvement in performance across many of the group’s businesses compared with 2Q20.
• Underlying net profit for 3Q20 was down y-o-y and the group guided that its performance is expected to remain weak in 4Q20, significantly influenced by the impact of COVID-19 and the reduction of government support in 4Q20.
• Jardine Matheson’s key earnings contributors are Hongkong Land (SGX:H78), Dairy Farm (SGX:D01) and Jardine Cycle & Carriage (SGX:C07).

Hongkong Land (SGX:H78) (ADD, Target Price US$5.10)

• Raymond Cheng, our HK colleague who covers Hongkong Land, notes that its HK Central office portfolio continued to register positive rental reversion in 1H20 despite rising vacancy. He reiterated his ADD call in view of its resilient investment property portfolio, coupled with attractive valuation (60% discount to NAV).

Dairy Farm (SGX:D01) (ADD, Target Price US$4.50)

• For Dairy Farm, analyst Cezzane level, once recovery plays are revisited. Cezzane recently upgraded her call on Dairy Farm to ADD, with a lower target price of US$4.50 (on an unchanged 20x FY21F P/E).

Jardine Cycle & Carriage (SGX:C07)

• Jardine Cycle & Carriage (SGX:C07)’s performance continued to be affected by challenging trading conditions, caused by weak business and consumer sentiment, although there was some improvement in a number of its businesses q-o-q. Its key contributor Astra saw better performance q-o-q but most of the business segments remained under pressure.

Slow Recovery Ahead – Downgrade Jardine Matheson to HOLD

• We believe most of the bad news has been priced in and Jardine Matheson could re-rate back to 0.85x P/BV (historical FY00-FY1 average). However, recovery is likely to be a slow and long process; hence, we downgrade Jardine Matheson to a HOLD, with our target price now based on 0.85x FY20 BVPS (previously 0.78x FY20F P/BV).
• Key upside/downside risks remain COVID-19 impact on economic conditions in Greater China and Southeast Asia as well as US-China tensions.

Source: CGS-CIMB Research - 1 Dec 2020