CLSA JASA MARGA (JSMR IJ), leaner operation, BUY, TP Rp2,950

Sarina has just written a report on Jasa Marga (JSMR IJ), the country’s largest toll road operator in Indonesia. We increase our profit forecasts by ~10-17% for 2010-12, on the back of higher margin assumptions.

The stock is trading at 13.4x PER11CL. Our TP is also increased to Rp2,950/sh, implying 15x PER11CL.

The company has almost a de facto monopoly in the toll road business in the country. With vehicle sales going very strong in Indonesia, we are only going to see more traffic (some toll roads are congested on the daily basis). No issue with the top lines.

As such, the key factors that determine short-medium term margins are (1) cost of capital and (2) overall cost management. And it seems like things are going really well for JSMR on these two fronts. We expect further margin expansion.

(1) Declining cost of capital. JSMR has a bond of Rp650bn expiring Dec2010, which carries a 16.15% coupon. We believe this can be refinanced at a lower cost (we expect single digit rates). If we lower our cost of capital to 11% (from 14.5% previously), the equity value per share of the company (DCF derived) will come to be Rp4,578/sh vs Rp3,071/sh now.

(2) Better than expected cost management as JSMR pushes forward with its cost management, and the e-toll system. EBITDA margin expanded to 65.6% in 2Q10, the highest in their history. Margins have expanded steadily in the past four years. About 20% of JSMR’s workforces are outsourced.