Jasa Marga, Target price Rp5,500 (upgrade from Hold)

Constructing growth

Continued disciplined growth. With resilient traffic growth and periodic tariff adjustments, Jasa Marga (JSMR) is set to deliver sustainable double-digit average earnings growth of 20% pa over 2011- 13. An additional organic growth engine would come from 9 new toll roads, which will be in the development stage in 2012. Coverage of the toll road sector is transferred to Pandu Anugrah from Lucky Ariesandi.

Construction of 59km of new toll roads imminent. JSMR is set to commence construction of 59km (6 routes) of new toll roads in 2012. The boost in traffic volumes from the completion of the new roads will be driven by connectivity with existing routes. Long-term support for
traffic volumes would stem from completion of land acquisition on the remaining 153km roads, targeted for commercial operation in 2014. Note that faster-than-expected completion of new toll road projects could materialise from full completion of the land clearing law.

Further tariff adjustments on two concessions. Periodic tariff adjustments of around 10% is scheduled to be applied for Jakarta’s Cikampek and Sedyatmo toll roads in June 2012. This is in addition to the major tariff adjustments on 11 routes which the company received last year. Automatic increases in tolls would ensure guaranteed investment returns, given high risk and significant capital amount.

Double-digit earnings growth to stay intact. With stable annual volume growth, regular tariff adjustments, and organic expansion through new toll road developments, we expect 2011-12 earnings growth of 18.6% YoY and 20.2% YoY respectively to be attainable.

Raising our rating to BUY with higher TP of Rp5,500. With a defensive earnings growth profile and using WACC assumption of 11.0%, we raise our TP for JSMR to Rp5,500 from Rp4,330 previously.
Our new TP implies 22.0% potential upside., causing us to raise our rating to BUY. While JSMR is trading at 2012F PER of 18.6x, PEG of 0.9x remains below 1.0x.


Safeguarded growth profile
Positive catalysts remain on solid ground. JSMR growth will come from both volume and automatic tariff increases. We expect positive operating growth performance in 2012-13 to be driven by:
• Stable YoY volume growth of 3%-5% on existing concessions.
• 9 new toll road development with total length of around 200km, of which 6 (59km) would start construction in 2012. Around 100km would be constructed under the Trans Java route.
• Automatic tariff adjustment on two routes. This is stipulated under Public Works Ministry Decree No 15, allowing toll road operator to increase tariff every two years. For JSMR, 11 routes
would receive tariff adjustment in odd year (2011) and 2 routes in even year (2012).

Sustainable traffic growth
Indicative 2011 revenue of Rp4.9t. Buoyed by higher 2010-11 car sales, the operation of two new toll roads (13.6km) in 4Q11, lane expansions, and relocation of toll booths (inorganic), JSMR recorded 2011 traffic volume growth of 13.7% YoY to 1.1m vehicles. That said, JSMR management indicates that its 2011 revenue target of Rp4.9t remains (+11% YoY) intact, partially stemming from a 10% tariff adjustment on 11 routes in September.

Volume progress on newly operated routes. In December 2011, JSMR operated two new sections of the Semarang-Ungaran (11.3km) and Waru-Sepanjang (2.3km) toll roads, with initial traffic volumes of 370k (12k/day vs. 9k/day forecasted) and 593k (20k/day vs. 22k/day
forecasted) respectively. We expect a gradual improvement in traffic on the new routes to occur in 2012, as volumes would normally grow at 8-15% per year in the first five years of operation, before plateauing at 5% per year after ten years.

2012 volume growth of 4% YoY. With the operation of new toll roads and stable car sales in 2012, we expect traffic volumes to grow 4% YoY to 1.1m vehicles, in line with management guidance. Note that we do not expect a significant adverse impact on traffic volumes from possible higher gasoline prices or limitations of subsidised fuels, due to a resilient historical traffic profile.

Major construction phase in 2012
59km of roads under construction. With significant progress on land acquisition for its existing projects, JSMR is poised to undertake construction of 59km of new toll roads (of the total 200km of toll roads to be constructed in its portfolio) in 2012. It is worth pointing out that
most of the new routes will be connected with the existing routes operated by JSMR, paving the way for further support of traffic volumes. Note that in 2013, domestic toll road completion schedule would be 59km from JSMR and 40.5km from other toll road operators.

source: KIMENG dated 14 February 2012