CLSA Jasa Marga (JSMR IJ): in an exciting time, earnings upgrade, TP Rp3,750/share

Our analyst Sarina upgrades Jasa Marga (JSMR IJ) profit forecasts by 11-16% for 2010-12 on the back of higher margin assumptions and lower cost of debt. We also raise our TP to Rp3,750/sh (from Rp2,950/sh) and based on project IRRs of 13-18%. This is on the back of lower WACC as we decrease the cost of debt assumption.

The table below summarizes the value of the company assuming different cost of debts. Our TP of Rp3,750/sh is still at a discount to the values presented; hence we believe there is more upside from investing in this company long term.

Key points from the report:
Declining cost of capital. JSMR had successfully finalized the offering of two bonds on 24Sep: Rp1tn at 9.35% coupon and Rp500bn zero-coupon with yield of 9.1%. The Rp1tn bond is to refinance a Rp650bn maturing bond of 16.15% coupon, and the remaining for a bank loan of 11% interest. As maturing debt got refinanced, average cost of debt had fallen from 13.6% in 2006 to 11.9% in 2009, and is expected to drop to 10.5% in 2011.
To acquire more toll road projects in 4Q10 Financing should not be an issue given its debt covenant can allow a further expansion of max. ~190km , on top of its current seven projects which are 189km in total, a 38% expansion from existing network.
Margin expands with growth and better cost management. Increasing productivity and operational leverage had resulted in margin expansion. Opex as % of revenue had trended down to 35% in 1H10 from 54% in 2005. We believe further automation and cost management in operational activities will be an additional kicker to margin expansion.
A long term investment . Strong demographics, resilient traffic growth, lack of infrastructure, better cost management, and strong positioning are the key success factors for JSMR. The potential revision to land clearing law in the near future will also be very positive.
We increase our profit forecasts by 11-16% for 2010-12. Our TP is also increased to Rp3,750/sh. The stock has re-rated and is now trading at 14.7x PE11 and 12.9x PE12. While this looks more expensive vs regional peers, on a PEG ratio, it is cheaper. The ROE is also higher than the average peers.
Maintain BUY.