Mar 08, 2017 08:51:12

JASA MARGA ($JSMR) - Long-term play

Road to prosperity
Underdeveloped infrastructure has become a major drag on Indonesia’s economic growth. Unsurprisingly, one of the first reforms by President Jokowi was eliminating the fuel subsidy program. By switching from idle spending to productive spending, Jokowi has secured fiscal flexibility to implement his reform agendas, in particular, infrastructure projects that will spur economic growth. The government has increased its infrastructure budget, and President Jokowi has rolled out a number of economic packages and presidential decrees aimed at reducing bottlenecks and helping to expedite construction of government projects, including toll roads.

Short-term remains challenging…
As the capex cycle is in expansionary mode, we believe that Jasa Marga (JSMR) still needs to escalate its leverage position. As long-term debt increases, we expect to see higher gearing level in FY17F. We also anticipate its debt-to-equity ratio to continue to climb, as we expect the company to secure financing via syndicated bank loans and/or bond issuance, on top of other announced financing schemes.
Our back-of-a-napkin calculation shows that JSMR could deploy around IDR65tr of total capex for fifteen new routes. Furthermore, pressure on the firm’s bottom-line is inevitable, as we expect to see higher interest burden. We do not expect the company to book a net loss, however, as its topline growth will stay robust on the back of bi-annual tariff adjustment and new routes commencement. Nonetheless, negative bottom-line growth seems plausible, in our view.

… but the future looks promising (if solid strategies are implemented)
During the current expansionary period, JSMR will rely on the bi-annual tariff hike scheme and new routes to drive its topline. Ergo, well-planned financing schemes and prudent cost control will act as imperative buffers to absorb extraordinary expenses. If the strategies can be implemented effectively, we are optimistic about the future of the company, as route additions will act as a positive catalyst for JSMR’s growth in the long run.

Attractive long-term prospect despite short-term challenges
All in all, we believe that JSMR’s capex expansion would prove fruitful in the long run, as construction of new toll roads will drive revenue growth in the coming years. However, financing remains a major hurdle for the company. Still, with support from the government, as well as solid financing plans and prudent cost controls, we believe that JSMR will be able to reach its long-term targets and remain the leader in the Indonesian toll road industry. Key risks to our call include: 1) unsupportive government regulations; and 2) higher-than-expected financing costs.