SINGAPORE (Dec 9): Deutsche Bank is initiating coverage of Jardine Strategic and Jardine Matheson with a “buy” and “hold” respectively.

With an under-leveraged balance sheet, secure cash flow and regional operations, the Jardine group is well positioned in an environment of challenging growth across Asia, says Deutsche analyst Kevin Chong in a Monday report.

Chong said these conditions create M&A opportunities which the group has a knack for exploiting.

“The stocks have lagged meaningfully over the past year. JS is now undervalued by 20% in our view and we initiate it with a Buy, while JM (Hold) is at our fair value,” says Chong who has target prices of US$54 for Jardine Matheson and US$32 for Jardine Strategic.

While the complex group structure and cross-holdings have been criticised in 2000/01, Deutsche’s analysis suggests the group has created significant value since then, in some instance via increasing intra-group holdings.

“This successful capital allocation has seen Jardine Matheson’s market value rise 10-fold, outperforming the region’s three-fold gains during 2000-14. Group net income rose 14-fold from a low of US$115 million ($162 million) in 2001 to US$1.7 billion in 2014, while book value saw a 15-year CAGR of 21%,” says Chong.

And although group is currently facing industry headwinds, Chong believes this will also negatively affect peers and create M&A opportunities for the Jardine group.

The Jardines are also not averse to raising gearing if the right opportunity arises, and Chong estimates it can raise additional funds of US$10-14 billion if net gearing rises to 30-40%.

The health and strength of consumer spending in the region also has direct implications on earnings at Dairy Farm, Astra and HK Land.

Jardine Matheson is down 0.7% at US$49.25 while Jardine Strategic is down 0.5% to US$27.49.