Mandiri Sekuritas JSMR: Improving margin

High increase in tariff and traffic growth plus low operating expense boosted JSMR’s 1H10 operating margin to 52%, compared with 40% in the previous year; generating net profit amounting to Rp648bn (+63.7%yoy). The company raised the tariffs on 11 out of its 14 toll roads by around 16% on 28 Sep’09. Traffic volume in 1H10 increased by 3.3%yoy, to 464.7mn. But not all are looking good: JSMR hasn’t been able to meet lands acquisition schedule for the 7 new toll road projects. Hence, the development of the projects could be delayed. We have ! a Buy rec ommendation on JSMR. It trades at PER10F of 13.3x.

Strong revenue growth. JSMR booked revenue of Rp2.1tn (+23.5%yoy) due to high traffic volume and increase in tariffs. Meanwhile, lower salaries elevated operating margin to 52.1% from 40.4% in the previous year. By end 1H10 JSMR’s permanent employee totaled 5,394 persons (-1.3%yoy), with outsourcing workers of 1,347 persons. The company is committed to increase the portion of the outsourcing employees as 80% of its total manpower is on operational level as booth operators. Net income recorded at Rp647.6bn (+63.7%yoy).

Traffic volume up 3.3%yoy to 464.7mn vehicles.. The highest traffic growth occurred in the Cipularang toll road, growing by 10.8%yoy. The JORR section contributed the biggest revenue of around 20.3% of the total amount. Meanwhile, the highest traffic was contributed by the JIRR toll road, accounting for 19.9% of the total vehicles using the company’s highways.

Potentially delayed. Almost all of the 7 new toll road projects are potentially delayed due to slow land clearing process. For example, the Surabaya-Mojokerto (36.3Km) which will consist of 5 sections failed to meet the land clearing scheduled for the 1H10. But the company managed to complete around 52% of the land needed. Meanwhile, no land has been cleared for the Kunciran-Serpong even though the company started the process in the middle of 3Q09. (Exhibit 4).

Maintain Buy. We like JSMR as the company operates around 76% of total toll length in Indonesia, while toll tariffs must be raised every 2 years, and car sales are increasing. We used DCF valuation (WACC 11.4%) to arrive at target price of Rp3,200/share, translating into PER10F-11F of 16.3x and 14.4x, respectively. We maintain Buy recommendation on JSMR.