Which is more undervalued: Jardine Strategic or Jardine Matheson?

I have bought into Jardine Strategic (JSH) this week. In my opinion, I think that JSH is undervalued as it trades at around 70% of its end 2006 market net asset value (MNav). I define MNav at valuing the company’s net asset at market value. This opinion has been addressed in my previous post.

In this post, I will attempt to illustrate another opinion. That is, I think JSH is more undervalued than Jardine Matheson (JMH). In my previous post, I have stated that JMH and JSH have cross-holdings in one another. JMH owns 80% of JSH and JSH owns 53% of JMH. After I has attempted to remove the cross-holdings, I find that JMH’s annual report uses the net number of shares after accounting for cross-holdings to compute its Nav and EPS (earnings per share).

The table below shows my finding on MNav of JSH and JMH. My finding show that JSH may be trading at a discount of 30% to its MNav, while JMH trades at a discount of 5% to its MNav. Again, this finding may be wrong as there are some assumptions behind the findings.

First, the total number of shares is derived by taking its Issued & Paid-up Capital divided its par value per share. Next, the net shares after cross-holdings are derived mathematically by accounting for JMH and JSH cross-holdings. JSH’s MNAV is taken from its 2006 annual report. However, JMH’s MNAV is derived mathematically by roughly taking 2/3 of the JSH’s MNAV and adding back the JMH portion not owned by JSH. (You may have to refer to the Market Value Net Asset Basis portion in JSH 2006 annual report for better understanding.)

The 2/3 proportion is obtained by taking the remaining JMH’s stake in JSH after deducting away JSH’s share of JMH’s share of JSH. To illustrate, given that JSH owns 53% of JMH and JMH owns 80% of JSH, JSH owns around 40% of its total shares on paper. Therefore, JSH’s net shares after cross-holdings are roughly 60% of its total shares, of which 40% belongs to JMH and 20% belongs to the public. Therefore, JMH’s MNav excluding the companies not owned by JSH is 2/3 (or 40% over 60%) of JSH’s MNav.

I repeat that my finding is dependent on the above assumptions being plausible and representative of the actual situation. As I may make mistakes in my fact-findings or in my computation, it would be best if one does one’s own research.

In any case, the present market does not seem to be interested in JSH. The market seems more interested in penny stocks. However, I have observed that Aberdeen Spore trust has JSH in one of its top 10 holdings in its factsheet. Furthermore, a renowned value fund management, Tweedy Browne, has JSH in its 20 largest holdings of its Global Value Fund as shown in its Q1 2007 commentary. I guess I can sleep soundly given this information.


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