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Jardine Strategic down 14% in biggest single-day drop
BLUECHIP heavyweight Jardine Strategic fell by as much as 14 per cent on Thursday as mayhem tore through the Singapore market, testing everything investors thought they knew about stock valuations.
Straits Times Index constituent Jardine Strategic (JS) was down 14.48 per cent or US$3.07 to US$18.11 as at 3.45pm, shaping up for its biggest single-day drop.
Other firms in the Jardine stable took a drubbing too, touching fresh 52-week lows. Jardine Matheson (JM) was down 6.45 per cent or US$3.24 to US$46.98 as at 3.45pm.
David Blennerhassett, who publishes on insight platform Smartkarma, told The Business Times: "It's quite apparent that a major investor or investors are exiting or blowing up in size and that means you're seeing excess volume in both companies (JS and JM)."
His guess is that sellers of JS may have got stuck playing the spread between JM and JS, which hasn't worked in their favour. Typically, the market expects JM and JS to move in tandem because the two companies own each other through a cross-shareholding structure, meaning they essentially own the same assets.
JM owns 85 per cent of JS, which in turn holds 58 per cent of JM. "There's circularity there, it's like a snake swallowing its own tail, so the two should be highly correlated," Mr Blennerhassett said.
But with the recent spike in market volatility, the usual relationship between two stocks seems to have collapsed to levels never seen before. The share price ratio of JM to JS (JM/JS) is now 2.60.
This compares with the long-term average ratio of 1.71 by Mr Blennerhassett's calculations, using prices from 2002 to now.
Anyone who had bet on a mean-reversion by shorting JM and buying JS when the ratio began shooting to unprecedented highs earlier this week would have been squeezed, he added: "What it came down to was the trade was to go short JM and long JS based on the long-term ratio, which hasn't worked because markets have gyrated. And it's completely distorting things... Earlier this week at a ratio of 2.1 I thought it (JS) was a buy... now I'm running out of superlatives."
The divergence between JS and JM now is unjustified, Mr Blennerhassett said, but there's no saying when normality will return either as indiscriminate selling seems to be the mood of the moment in global markets.
United First Partners analyst Justin Tang noted that market watchers have witnessed a whole lot of unusual events in the past two weeks, such as rising US Treasury yields even as stock prices plummet: "The equity-bond relationship broke, didn't it?"
He added: "To understand Jardine Strategics' fall, it's best to look at its constituents. People sell those components and it feeds through."
Jardine Cycle & Carriage (JC&C), which is 75 per cent owned by JS (and indirectly 75 per cent owned by JM), was down 8.53 per cent or S$1.57 to S$16.83 as at 3.45pm.
JC&C owns a 50.1 per cent interest in Indonesian conglomerate Astra International, which makes it a loser if the Indonesian rupiah continues its freefall.
Over the longer term, Mr Blennerhassett believes that it would make more sense for JS to trade at a 40 per cent discount to its adjusted net asset value (NAV), instead of a 55 per cent discount now. Likewise, JM should trade at a 20 per cent discount to its NAV after adjusting for cross-holdings, instead of the 14 per cent discount that the market is pricing now.
Otherwise, very little makes sense in today's market. Mr Blennerhassett said: "The only reason why JM's discount to NAV should be tighter (than JS's) is because the Keswick family's stake is in JM, and JM also pays a higher dividend. JM also bought back some shares last Friday and they have more money to do buybacks should they choose to do so. That may help increase the simple ratio of JM/JS but does not account for where the ratio is today."