Mark Landecker - co-portfolio manager - profiled our investment in the Jardine positions at our FPA Investor Day. These Hong Kong-based holding companies can trace their roots back to 1832 and the founding family remains in control and continues to manage and shepherd the growth of these sister entities.
About 80% of the value of our estimate of the net asset value (NAV) of the Jardines is comprised of the following listed companies: HK Land, Mandarin Oriental Hotels, Dairy Farm, Jardine Lloyd Thompson and Astra.
As is typically the case, one often needs a little bit of market distress or company-specific hair to buy a high-quality business at an attractive price. In the case of the Jardines, we got a bit of both earlier this year. The hair is the convoluted cross-shareholding structure that is confusing and requires some mental gymnastics to figure out what you are actually buying. Although he walks around our office barefoot at times, we don’t know if contrarian analyst Chris Lozano will ever be mistaken for an Olympic gymnast, but he did gold-medal work in disaggregating the financial statements of the various holdings so we could figure out what we were paying for this fine collection of businesses.
Throw in a small emerging-market selloff earlier this year and we had the ingredients to purchase what we viewed as a compounder with high-quality assets, an unlevered balance sheet and a long-term, owner-operator management team at the helm for a reasonable multiple of 12x earnings. On an NAV basis, this equated to discounts of 37% for Jardine Strategic and 28% for Jardine Matheson, with Jardine Strategic being our larger holding due in large part to the greater discount. Thanks to its management’s excellent stewardship, Jardine Strategic has grown its equity/share at a 22% rate over the past decade, more than twice the 10% rate of the far better-known Berkshire Hathaway.
Russia
Early in the year, we began to focus on Russian companies as many global businesses seemed reasonably priced. We ultimately settled on a commodity basket that we could buy if, and/or when, its stock market sold off. We chose commodity companies because their dollarized revenue stream limited exposure to the ruble, which is expensive to hedge. Furthermore, these businesses account for 25% of Russia’s GDP and 50% of the country’s governmental revenue so it’s clear they are of critical importance to the state. We also believed that there was some ability to mitigate U.S. sanctions as the underlying asset is globally traded.
When Russia ‘annexed’ Crimea, we had our opportunity. The companies in our basket traded at huge discounts to their global peers and, despite low-pay-out ratios, had dividend yields that were much higher than their P/Es. The average P/E of the basket at purchase was less than four times current year consensus estimates while the average current dividend yield was greater than 5%. We appreciate the risk of investing in a country with a complex, authoritarian political system and that our upside could potentially be taken by the government, but we also believe that the prices at which we purchased these securities were sufficiently discounted to offer an asymmetric risk/reward that was skewed in our favour.