(The following statement was released by the rating agency)
Sept 28 -
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Summary analysis -- Jardine Strategic Holdings Ltd. --------------- 28-Sep-2012
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CREDIT RATING: A-/Stable/-- Country: Bermuda
Primary SIC: Holding
companies, nec
Mult. CUSIP6: 471119
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Credit Rating History:
Local currency Foreign currency
17-Jul-2008 A-/-- A-/--
28-Oct-2001 BBB+/-- BBB+/--
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Rationale
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.
Liquidity
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.
Outlook
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
Source: http://news.yahoo.com/text-p-summary-jardine-strategic-holdings-ltd-065215600--sector.html
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