Nov 30, 2016 11:50:18

Jasa Marga ($JSMR): King of the road
Toll road: Indonesia
§  New toll-road projects support long-term earnings growth: As a domestic toll-road company with the greatest operating assets (61% market share), JSMR will likely benefit from President Jokowi’s push to accelerate toll-road projects. By 2020, we expect JSMR to operate 30 toll-road concessions (currently: 19) with a total length of 1,224km, up 106% from present levels of 593km. Apart from such large projects in its pipeline, JSMR plans to initiate two Jakarta-Cikampek expansion sections to complement the current Jakarta-Cikampek toll road, which carries the most traffic and generates the highest revenue for JSMR, providing earnings support ahead. This note marks a transfer of analyst coverage.
§  Margin support from e-money and low interest rates: In the next few years, JSMR plans to increase its revenue proportion from e-money toll stations to 80% in 2018 (23% as of 1H16). This would lower personnel costs (20% of JSMR revenue) by around 30%, improving the company’s cost structure in the long run. In 2017, JSMR expects its e-money revenue proportion to reach 50%. Furthermore, we expect lower interest rates ahead to support JSMR’s net profit given its substantial 2017 net gearing of 193%. That said, JSMR plans to lower its 2017 interest cost from around 10.4% to 9.0% through several refinancing initiatives. With lower interest rates, we expect JSMR’s interest coverage to hover around 2x in 2017-18.
§  Lower capex requirement on innovative payment structure: In 2017, we expect JSMR to spend capex amounting to IDR18tn (+73% y-y), to fund expansion of several toll-road projects. JSMR plans to structure capex for several toll roads such as Batang-Semarang, Samarinda-Balikpapan, Jakarta-Cikampek Elevated, Pandaan-Malang and Manado-Bitung using turnkey-CPF-and-LC schemes in order to minimize cash outlays for its investments in 2017. Thus, JSMR’s cash flow should be well-supported. On depreciation, JSMR will continue to use a traffic-based depreciation method, which lowers depreciation expenses for some new toll roads in the first few years while their traffic carried is still low. This will likely support JSMR’s bottom line as 7 new toll roads will become operational in 2017.
Ensuring longer term growth through IDR1.8tn rights issue
In order to ensure longer-term growth, JSMR is in the midst of conducting its rights issue in December 2016 with pricing set at IDR3,900, translating to a total fund raising of IDR1.8tn. JSMR will direct the proceeds towards three new toll-road projects: Balikpapan-Samarinda, Manado-Bitung and Jakarta-Cikampek elevated toll roads. On earnings, we expect JSMR’s 2017F revenue of IDR9.6tn (+10% y-y) and 2018F revenue of IDR11.2tn (+16% y-y) to result in 2017F net profit of IDR1.9tn (+8% y-y), before growing 8% y-y to IDR2.0tn in 2018F. In terms of dividends, JSMR plans to raise its dividend payout from 20% to 30%, allowing for 2017 dividend yield of 1.9% (market’s 2.6%). On valuation, our new IDR5,287 Theoretical Ex Rights Price (TERP) 12-month TP implies a 2017F PER of 22.5x, a 25% discount to its past-5-year average forward PER. BUY with 26% upside potential to our TP. Risks: Lower-than-expected traffic growth and execution delays of its toll-road projects.