In my last article I introduced readers to the Jardine Matheson Holdings Limited (OTCPK:JARLF;OTCPK:JMHLY) and Jardine Strategic Holdings Limited (OTCPK:JDSHF;OTCPK:JSHLY). The two companies and their subsidiaries form a rather complicated group. Jardine Matheson owns 85 percent of Jardine Strategic which in turn owns 57 percent of Jardine Matheson. Furthermore the companies are lead by the same people. They do even share a website: www.jardines.com(the "S" already implies that there are two of them). I decided to first introduce the group as a whole before discussing the comparative advantages and disadvantages of the two stocks. I thus advise readers who are not yet familiar with the companies to first read my introduction to the group. Please note: you might realize that some figures slightly differ. That is due to the dynamic market capitalizations of the respective listed assets.
So which of the two stocks is the better investment? The answer depends on what you are looking for as an investor. It is however crucial to get one thing straight from the beginning. Each company has exposure to the whole groups portfolio through the cross holdings. Only the relative composition varies. Therefore, if one fundamentally dislikes either one of the companies, it would be advisable to refrain from buying stocks of the other too.
Which One Is the Top Layer?
First it might be interesting to know which company is the top layer of the holding structure. This is not the easiest call given that unlike in most cases it is not feasible to simply take a look at who is controlling whom. I do however believe that where there has to be a decision the better arguments would be with Jardine Matheson as this is the company in which the leading shareholder (the Keswick family) own their stake. The group itself also presents Jardine Matheson as the parent.
Portfolio And Discount
Jardine Strategic bundles the groups ownership interest in a number of listed companies (some of which are managed by Jardine Matheson's other subsidiaries). Holdings include majority stakes in Hongkong Land Holdings Limited (OTCPK:HKHGF;OTCPK:HNGKY), Dairy Farm International Holdings Limited (OTCPK:DFILF;OTCPK:DFIHY), Mandarin Oriental International Limited (OTCPK:MAORF;OTCPK:MNOIY) and Jardine Cycle & Carriage Ltd. (OTCPK:JCYCF;OTCPK:JCYGY) - which in turn owns 50 percent of PT Astra International Tbk (OTCPK:PTAIF) - as well as minority positions inZhongsheng Group Holdings Limited (OTCPK:ZSHGY) and Greatview Aseptic Packaging Company Ltd. (OTCPK:GRVWF). Based on the respective assets current share prices (as of June 7th), they have a combined value of $26.77billion.
Besides its 85 percent of Jardine Strategic, Jardine Matheson directly owns two primary subsidiaries: Jardine Pacific, a holding company which operates itself or through joint ventures a variety of industrial companies, and Jardine Motors which through its subsidiaries operates car dealerships across Hong Kong, Macau, China and the UK. In its 2018 annual report Jardine Matheson lists some other investments (see page 65) with a combined value of $2,642 million.
For more detailed information on the respective portfolios please take a look at my previous article.
Jardine Strategic trades at a 20.3 percent discount to the value of its listed assets alone; on top of that comes a 57 percent in the rest of the groups portfolio. Assuming that Jardine Strategic is fairly priced and leaving aside the other investments (as the value of those could have changed significantly in either direction) the valuation of the remaining business would be about 2.33 billion, 57 percent of which would be 1.33 billion. Based on the reported 2018 profit this would result in a PE ratio of 6.85 for the overall portfolio (Jardine Motors plus Jardine Pacific). This is admittedly a very simple method and may not accurately reflect the value of those businesses. I do however think that it might be suitable as a - very conservative - estimate for this articles purposes. If one includes the 57 percent indirect stake in those businesses at the valuation laid out above the discount would reach 24.1 percent.
Jardine Matheson on the other hand would trade at a 18.38 percent discount on the basis of the above calculations (85 percent of the value of Jardine Strategic's portfolio + $2.33 billion). That is once again leaving aside the other investments.
I therefore come to the conclusion that if one is looking for the highest possible discount, Jardine Strategic would be the more suitable investment. Please keep in mind: The higher higher the assumed valuation for the non listed assets the narrower the gap between the respective discount figures.
Both companies do pay dividends. The dividend growth rate has been the same (2018: 6 percent) recently. Jardine Matheson pays an annual dividend of currently $1.70 per share. Jardine Strategic pays an annual dividend of currently $0.34 per share. Thus at the respective stocks current prices Jardine Matheson pays a significantly higher yielding dividend.
Which of the two companies is the more suitable investment for depends on whether one prefers the listed assets or the non listed assets to be overweighted. Jardine strategic has 100 percent of the listed assets and 57 percent of the unquoted holdings. Jardine Matheson in turn has 100 percent of the unquoted and 85 percent of the listed holdings.
If one is interested in one or several but not all of the listed assets yet not so much in the private holdings, it would of course be advisable to directly invest in those stocks. The same is true if one would prefer to only own the listed business in their entirety but without getting exposure to the unlisted portfolio.
If one is particularly keen on getting exposure to the portfolio at the highest discount possible, I believe Jardine Strategic to be the better choice. Jardine Matheson on the other hand is more attractive in terms of dividend yield. However I believe that both stocks are not exactly what the typical dividend investor will be looking for so the importance of that argument might not be that great after all.
Lastly, investors should also keep in mind that Jardine Matheson is the more frequently traded of the stocks. Thus investors might want to include liquidity in their considerations.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.