Thursday, June 25, 2015

Jardine C&C Rights Issue!

Jardine Cycle and Carriage (JCNC) announced a surprised SGD billion dollar rights issue a week ago. Well given how the stock has declined a month before, I guess it wasn't a surprise to some insiders. Now that the cat is out of the bag, it's time to do a quick and dirty analysis on this blue blue chip. 

For the un-initiated, JCNC is probably most well-known in Singapore as the distributor for Mercedes-Benz and making tons of money on that franchise but in reality, the Singapore business contributes at most 10% to profits and the bulk of the business actually comes from Indonesia. JCNC's subsidiary Astra is the largest automobile and motorcycle distributor in the ASEAN's largest country and earning very, very good profits. Astra itself is also a conglomerate and owns a bunch of other businesses including plantations and construction machinery (as a distributor for Komatsu). So well, Cycle and Carriage is but a small piece of the puzzle.


Jardine Cycle and Carriage is itself c.75% owned by its parent which is locked in a cross shareholding structure to ensure that they would never be taken over. Jardine Strategic (JS) owns the chunk in JCNC and its counterpart Jardine Matheson (JM) owns Strategic and other stuff while JS also owns JM. Yes... mega-convolution. The Jardine group has a long and convoluted history which we shall discuss in a minute. In a nutshell, it is a conglomerate owning another conglomerate while owned by another conglomerate.

Why so complicated? Well, that's because Jardine is a dynasty and as we know from Chinese drama series about the imperial dynasties, things are more than complicated when we have huge families, multiple wives and concubines. It's already complicated with just one wife... so tell me what happens when there are five ;) ? Besides that, Jardine was actually active during the Qing Dynasty, most infamous for their role as opium traders. This fact alone, causes much controversy to this day which is perhaps attributed to why the families have kept themselves very private and the listed companies are also more than secretive despite their status as public companies.

Nevertheless, Jardine companies have been known as good companies with competent business managers and so investors had turned a blind eye to its lack of disclosure and secrecy over the years. Jardine Cycle and Carriage has generated tremendous value to shareholders in the last five to ten year, thanks to the wonderful business franchise it has in Indonesia.

Jardine's compounding capability


Jardine's business in Indonesia is run by its subsidiary Astra. This is one of the strongest franchise in this part of the world and has helped Astra grow strongly so much so that it is now usually regarded as a proxy for Indonesia. So when global investors are positive about Indon, rather than buying some Indon ETF, they would actually buy Astra. 

Now what's so great about Astra's business? Well, essentially it is the de-facto vehicle distributor in the country with c.50% market share in both cars and motorcycles. It markets for Toyota and Honda and dominates the market. Even better, it also does the financing when consumers buy their vehicles and it also operates the service and maintenance for the vehicles it sells. These are high margin businesses with strong cashflow generation. With this core business it has since branched into insurance, manufacturing, construction, property amongst others although auto distribution remains very important. From its subsidiaries, JCNC has been able to deliver USD 1bn in free cashflow (FCF) annually in recent years.

Finally, let's discuss its rights issue. Why did this great firm, doing great, come to ask for money out the blue? The official reasons were that its debt level of c.USD 4 billion was too high and given that it also spent close to another billion to buy a stake in Siam City Cement, it wanted to beef up its balance sheet. Also given that the parent owns 75% of the firm and has essentially underwritten the whole deal, it stands to benefit from any other shareholders not subscribing and further increase its stake.

The rights would be issued at $26, a 26% discount to its current price so it would be imperative for any existing shareholders to subscribe (esp with the Great Singapore Sale coming to an end, 26% discount is BIG DEAL!). The question is then should new investors buy at this juncture? Well... given that it has fallen quite a bit and FCF actually hits 10% now and if we buy, we get more rights at $26, it seemed like a no brainer to buy now. 

On this note, I would also like to highlight 10% FCF yield is quite a nice rule of thumb to make good money. This is provided that the FCF is sustainable and needless to say the company is a going concern with solid management and a good business franchise. There are usually "10% FCF yield stocks" that screens can throw out but if they are not sustainable then it's meaningless. Once in a rare while you see a great franchise giving 10% FCF. Today it looks like it's JCNC.

Now why is 10% so special? Essentially it means that the co. need not grow, it can just stay status quo for 10 years and we are still good. Say if you give me $100 today and I will give you $10 a year indefinitely. At any time, you can also sell it to someone else and get back your principal of $100. That's a pretty good deal isn't it? Over the course of my investing career, I have found that when a reasonably okay company reaches 10% FCF, usually there's easy money to be made.

What about risks? Of course there are risks, every investment has risks and the call is whether the risk reward is asymmetrical. The first risk for Jardine is obviously the investment that it is making. Siam City Cement is a brand new business in Thailand where the group has not much of track record. It remains unclear why they made the investment. Also as a conglomerate simply owning stakes, its cashflow is limited to the dividends that its subsidiaries pay. Hence the need for capital raising from time to time. The stock has also suffered as a result of the woes of Indonesia and the rupiah weakness but I believe this one is pretty well-known and should be factored in today's stock price.

But having said all that, at 10% FCF yield, JCNC is very palatable and is likely to continue to grow out of these short term issues over 5 to 10 years. Taking a short term view now means only seeing the doom and gloom but in a decade, this would probably look like one of the rare times to be able to buy this strong franchise cheap! 

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