Dec 01, 2016 11:44:37

Jasa Marga: A More Robust Return (JSMR; Rp4,180; BUY; TP Rp5,175)

Favorable terms with lenders and contractors during construction phase should be able to support Jasa Marga’s working capital and profitability amid expansion period. We raise 2017F net earnings by 19% due to planned asset monetizing and better cash flow from CPF scheme. Upgrade to BUY with TP of Rp5,175.

Devising a more productive financing scheme. The planned development of 13 new toll roads would increase JSMR’s toll road concession to 1,235km by 2019. We calculate total capex in 2016-19F would reach Rp60tn, almost doubling JSMR’s 2015 total assets of Rp37tn. During this expansion period, JSMR plans to re-introduce the Contractor Pre Financing (CPF) scheme to improve its cash flow and reduce needs for borrowing additional debts. Note that JSMR has secured agreements with contractors of its new toll road projects (i.e. Balikpapan-Samarinda, Batang-Semarang and ManadoBitung) to defer payment until completion. By freeing up a much needed cash flow, we expect JSMR should be able to support the government’s effort in connecting cities through toll road network.

Monetizing existing assets. JSMR also plans to increase its cash assets through sales of existing toll road stakes. In 2017, we expect the company would offload its stakes in minority toll roads (e.g. Jakarta Lingkar Barat Satu – 19% stake) while reducing stake in majority-owned toll road (e.g. Trans Marga Jateng – 74% stake). Combined with the impact from CPF scheme, we have decided to raise our 2017 net earnings by 19%, continuing solid 18% y-y net profit growth in 2016F. It is worth noting that JSMR is on-track to achieve our 2016F target with 9M16 net profit of Rp1.3tn (+36% y-y, 74% of FY target) and Rp6.5tn sales (+18% y-y, 75% of FY target). Nevertheless, we have excluded JSMR’s plan to securitize its assets through creation of REIT or limited investment funds in our forecast as we now believe that JSMR would have sufficient cash flow in 2016-17F due to the CPF scheme.

Upgrade to BUY with 24% upside potential. We believe that improving profit outlook should be seen as positive news. After considering the share dilution from rights issue, we slightly lower our target price from Rp5,300 to Rp5,175. Note that we have considered a 25% discount to our DCF-based methodology (WACC: 9.7%) for margin of safety. Risks to our call are higher financing costs, unexpected delay in land acquisition, and unfavorable ruling in ongoing litigation case.