(The following statement was released by the rating agency)
Sept 28 -
Summary analysis — Jardine Strategic Holdings Ltd. ———————- 28-Sep-2012
CREDIT RATING: A-/Stable/— Country: Bermuda
Primary SIC: Holding
Mult. CUSIP6: 471119
Credit Rating History:
Local currency Foreign currency
17-Jul-2008 A-/— A-/—
28-Oct-2001 BBB+/— BBB+/—
The rating on Jardine Strategic Holdings Ltd. reflects the group’s diversified businesses across Asia, its good to strong competitive positions in key operating segments, and strong cash generation. The Jardine group’s conservative financial management, low leverage, and strong liquidity and financial flexibility support the rating. Jardine Strategic’s significant exposure to Indonesia (BB+/Positive/B; axBBB+/axA-2), and potential large investments and capital return initiatives temper the above strengths.
We take a consolidated view when analyzing Jardine Strategic and its ultimate parent, Jardine Matheson Holdings Ltd. (not rated). As of June 30, 2012, Jardine Matheson owns 82% of Jardine Strategic, which owns 55% of Jardine Matheson. We fully consolidate the key operating companies, and exclude the financial services debt of the group’s 50%-owned Indonesia-based conglomerate PT Astra International Tbk. (BBB-/Stable/—; axA-/—) in our analysis. This is because this debt is non-recourse to Astra, and is backed by receivables and hire-purchase vehicles. In our view, the risk management of Astra’s finance companies is satisfactory, and their leverage is well below the regulatory ceiling. These finance companies are also managed separately from the conglomerate and they raise funds mainly from the local bond and banking markets.
The Jardine group’s large exposure to Indonesia constrains the rating. A significant share of the group’s profits is from Astra. In the past three years, Astra accounted for at least a quarter of the group’s operating profit. In our view, the business environment in Indonesia has improved but remains volatile compared with other key Asian economies in which the group operates. We believe the group’s exposure to Indonesia will remain significant given Astra’s continued investments in the country.
We view the Jardine group’s business risk profile as “satisfactory,” as defined in our criteria. The group has a diversified portfolio of businesses across Asia. Most of its operating companies have good market shares or strong market positions in their respective businesses. The Jardine group also has a record of good profitability through business cycles. In the past three years, its profits have grown steadily with an average return on capital of 11%, which is stronger than similarly rated conglomerate peers.
The Jardine group’s strategy for growth remains conservative, in our view, despite the group’s increasing investments in China and some countries in Southeast Asia. The group mainly focuses on bolt-on acquisitions or internal growth to improve the market positions of its existing businesses. We do not expect the group to significantly deviate from its current strategy. The group has made some share repurchases and increased its shareholdings in several group companies as part of its capital return initiatives. We believe these investments are modest given the group’s low leverage and strong cash position. We expect the group to continue to retain large surplus cash while funding its capital expenditure and investments on a measured basis.
In our view, the Jardine group’s financial risk profile is “modest,” as our criteria define the term, supported by its consistently strong cash flows and large surplus cash position. On a consolidated basis, the group’s ratio of funds from operations (FFO) to net debt has been well over our downgrade threshold of 40% over the past three years. In 2012-2013, we expect the group to maintain good profitability and large positive free operating cash flows. In our view, the Jardine group has a diverse portfolio of businesses in Asia, which we believe will be resilient to a global economic slowdown. In our base-case scenario, after factoring in higher borrowings for new investments and capital spending than in 2011, we expect the group’s ratio of FFO to net debt at about 60% and EBITDA net interest coverage at about 9.0x in 2012.
In our view, the Jardine group’s corporate governance is fair. The Keswick family has a strong influence on the board although they own a small stake in Jardine Matheson. We believe the group’s good transparency and its consistent conservative financial management mitigate the risk.
The Jardine group’s liquidity is “strong,” as defined in our criteria. We expect its sources of liquidity to exceed uses by 1.5x or more in the next 12 months. Our assessment of the group’s liquidity profile incorporates the following factors and assumptions:
— Liquidity sources include cash and cash equivalents of about US$4 billion as of June 30, 2012, our projected FFO of about US$4.5 billion-US$5.0 billion for the next year, and committed banking facilities available for drawdown of about US$4.0 billion.
— Liquidity uses include short-term debts due in the next 12 months of US$2.2 billion (excluding financial services debt), projected dividends of US$1.2 billion, and estimated capital expenditure and working capital needs of US$4.5 billion-US$5.5 billion.
— We expect the group’s net liquidity sources to remain positive even if EBITDA declines more than 30%.
We believe the group has sufficient capacity to absorb a low-probability high-impact event. In our view, the group has good capital market standing and strong banking relationships to support its financial flexibility and provide additional liquidity.
The group’s various operating companies raise funds on their own and the group does not guarantee the debt of its subsidiaries and affiliates. The bank loan covenants on Astra and Hongkong Land Holdings Ltd. (A-/Stable/A-2; cnAA/cnA-1) are fairly loose, and we believe these companies will remain in compliance with their financial covenants in 2012 and 2013.
The stable outlook reflects our expectation that the Jardine group will maintain its consistent and conservative financial management and generate satisfactory cash flows. The outlook also reflects our expectation that the group will maintain a disciplined approach to investments, capital spending, and capital returns, such that its liquidity and leverage remain appropriate for the rating.
We may lower the rating if: (1) the group’s expansion and acquisitions are more aggressive than we expected; (2) shareholders’ returns initiatives are more substantial than we anticipated; and (3) profitability is significantly weaker than we expected. Our downgrade triggers could be a ratio of FFO to net debt of less than 40% or EBITDA net interest coverage of below 7x on a sustained basis.
We may raise the rating if the group’s business risk profile improves materially because of greater geographical diversification, lower concentration of profits from Indonesia, and a strong and sustained improvement in profitability in the next 12-24 months.
Related Criteria And Research
— Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
— Key Rating Factors For Chinese Real Estate Developers, June 2, 2008
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008