Jasa Marga (JSMR IJ; BUY; TP IDR 4,100): Reinitiating Coverage - Speeding on the Highway

ON THE PLATTER:

We believe that Jasa Marga (JSMR), the leading toll-road operator in Indonesia, offers attractive long-term and defensive prospects with stable and profitable business. We expect an EPS CAGR of 15% over 2011-13f, driven mainly by margin expansions from tariff hike. We are reinitiating coverage of Jasa Marga with a Buy rating and a DCF-based target price of IDR4,100. This implies 18% potential upside and a 2011-12f PER of 18.3x-14.9x.

· The king of toll operator. JSMR has been the backbone of toll-road development in Indonesia with market share rising from 69% in 1998 to around 76% currently. We believe its strong record in toll road development and operation, combined with its status as a state-owned company, should enable JSMR to maintain its dominant position in the recovery of the toll-road sector. Although the potential competition from new players is likely to increase, JSMR has secured strategic locations, especially in the greater Jakarta area. This should allow the company to better leverage on the recovery in economic activity.

· Earnings CAGR of 15% seen for 2011-13f. We see a 15% earnings CAGR for 2011-13f driven mainly by increase in toll tariff. We estimate revenue to grow by around 16% CAGR for 2011-13f, due to an average 4% annual traffic growth and average 6% tariff hikes per year. We forecast the company's EBITDA margin expand from 58.3% in 2010 to 64.6% in 2012f due to i) consistent tariff hike based on inflation rate, ii) high leverage from both incremental in tariff and traffic volume as its has large portion of fixed cost and iii) more automation is introduced. JSMR’s total length of toll road in operation is also expected to increase by 35% in the next 3-4 years, based on company’s guidance.

· Valuation and recommendation. We value JSMR on a DCF basis, using a WACC of 12.6% and a long-term growth rate of 0%. We believe that a DCF method is the best valuation method for a toll road company given its cash flow visibility. JSMR is now trading at 2011-12f PER of 15.5x-12.6x, in line with broader market. We derive the DCF value of IDR4,100/share, implying a 18.3x-14.9x 2011-12f PER and a 18% potential upside. Hence, we rate JSMR as a Buy.

· Risks statement. We believe the key risks to our earnings forecasts and target price are i) regulatory risks such as land acquisition, tariff, changes in government regulation , ii) delays and uncertainty regarding land acquisitions . They could affect completion and result in higher-than-anticipated investment costs and iii) we see the possibility of change in JSMR’s CEO in upcoming AGM in June may create an overhang on the performance of the stock in the near term.


source: OSK Nusadana Indonesia Equity Research Team dated 19 May 2011