Jardine Strategic, the one that got away

Investment and emotions tend to get mixed, ultimately resulting in poor investment decisions. Our experience with Jardine Strategic is a case in point:

We sold the stock in June as the stock floated around new record highs, despite the generally weak market sentiment at the time. Our investment thesis was that market technicals were weak and we were more comfortable holding a larger cash position to capitalise on temporary weakness in the market.

The stock did slump temporarily thereafter, providing a short window of opportunity to re-enter (which we failed to do), and then rocketed out of reach.

What went wrong?

We unfortunately let our emotions get the better of us, and the urge to take profit on a stock in a slumping market was too tempting to resist. We failed to relook our investment thesis for the stock (which was a compelling buy despite being at a record high), and we ended up selling an extremely high-conviction stock idea. We also had no predetermined re-entry target price, which meant that we failed to load up when the stock declined.

A mistake which we will try not to repeat:

• Never sell higher conviction ideas; always start with the lowest conviction stocks

Even now, we would be hard-pressed to find a compelling alternative to one of the Jardine holding companies, which allow exposure (at a discount still) to their stable of blue-chip franchises. Would we buy the stock at this time? The stock is already one of the best-performing stocks in the STI YTD, and cliched investment mantras relating to chasing hot stocks spring to mind. Patience is a virtue when it comes to investments, and we may prefer to wait for the next crisis (which could be years later!) to time our entry into the stock.

Jardine Strategic looking to buy back shares

Jardine Strategic, our largest holding in the portfolio yesterday announced its 2009 full-year results. No surprises in terms of profit, as the major subsidiaries have all reported earlier. With about 621 million shares outstanding (after adjusting for crossholdings in Jardine Matheson), total reported shareholder equity of US11,743 million means NAV per share is US$18.91, which means that the stock is currently trading at a discount to book. Reported NAV based on market value of underlying holdings is much higher, at US$32.64, almost twice the last traded price. We continue to view Jardine Strategic Holdings as a cheaper alternative to get exposure to a great pool of businesses, rather than to purchase the individual companies. 

What is interesting from the latest announcement is that Jardine Strategic is looking to buy back shares to reduce capital. The company is looking to spend up to US$250 million to repurchase 13.9 million shares in a buyback tender offer, pricing each share between US$18 and US$19. While this seems a paltry amount compared to outstanding shares of 1,107,130,421 (last reported), it must be noted that about 81% of the company's shares are locked up in Jardine Matheson, which will not be tendering any shares. This leaves about 210 million shares left to participate in the offer. Assuming all holders participate and a pro-rata offer results, this will result in a 6.6% decrease in free-float, leaving free-float at about 18%. This could have some negative implications on the weighting of the stock in the STI, and other major market indices which consider free-float as a key criteria. While the offer price appears tempting, it is unlikely that we will be able to sell our entire holding of 500 shares in the indicative US$18-19 range, and given that NAV is about US$18.91 a share, we will choose to keep our entire holding in the company, and benefit from the reduction in the number of outstanding shares.