Danareksa Jasa Marga (JSMR IJ, Rp2,600 BUY) Earnings upgrade

Outstanding 1H10 results
Jasa Marga has booked an excellent set of 1H10 results, beating our forecasts, on lower-than-expected opex, effective tax and net interest expenses. The lower-than-expected opex is attributable to lower overtime and higher efficiency, retirement, and the delayed human resource program. As such, we still expect mild increases in wages and salaries in 3Q and 4Q. As for the lower net interest expense, this was due to a higher cash balance which generated higher interest income. Net gearing, meanwhile, remains very low at only 13.6% as of June 2010. For tax, our assumption of 28% turned out to be too high as the effective tax was only 20% in 1H10. The low effective tax is a result of the significantly higher income which is subject to final tax.

Looking to issue bonds
Jasa Marga’s Rp650bn bonds series X – which carries an interest rate of 16.15% - will mature on 4 December 2010. At the same time, Jasa Marga also has outstanding bank loans of around Rp1.6tr as of June 2010. Hence, over the next 12 months, Jasa Marga’s cash outflow for maturing debts will be about Rp2.3tr. Thus in order to have sufficient cash to repay the maturing debt, Jasa Marga plans to issue around Rp1.5tr of new bonds with a maturity of 10 years – bearing an interest rate yet to be decided. Our guess is that the coupon rate should be around 10%. It seems that the company may be looking to issue the bonds rather early, taking advantage of its strong balance sheet and the low interest rates environment – a sensible ploy given the likelihood of a higher inflation rate in the coming months

Earnings revised up
We upgrade our earnings estimates by 18.9% for EPS FY10 and by 22.0% for EPS FY11. The main changes are lower effective tax of 20% for the period of FY10-12 and 25% for the following years. We have also adjusted our operating costs and net interest expense estimates to take into account the 1H10 financial result. However, we have not changed our revenues estimate as the 1H10 figure is within expectations.

TP upped to Rp3,100, BUY
Jasa Marga’s management seeks to improve the EBITDA margin through efficiency gains - especially from its human resources. Compared to the other toll road operators, Jasa Marga is overstaffed. Hence, by growing its business while keeping to a policy of zero growth in employee numbers, Jasa Marga’s management hopes to reduce the average number of staff per km of road. All in all, we remain upbeat on the company given its exposure to domestic economic activities – which are picking up their growth pace. With our earnings revision and basing our DCF valuation on FY11, our new Target Price for the shares is Rp3,100. This translates into PER FY11-12 of 14.6-11.2x and EV/EBITDA FY11-12 of 9.7-7.5x. BUY maintained.

Danareksa Jasa Marga (JSMR IJ, Rp2,300 BUY) Better than expected results

Net profits up significantly
Net profits surged 63.7% yoy to Rp2.1tr in 1H10 thanks to tariff increases effective in September 09. Traffic volume grew by an average 3.3% yoy to 2.6mn cars per day. All in all, the result is above expectations - mainly on lower-than-expected opex, interest expenses and tax rate.

Steady revenues growth
Total revenues rose 8.0% qoq to Rp1.1tr in 2Q10. Average traffic volume grew 3.9% qoq to 2.5mn vehicles per day. Moreover, we suspect Jasa Marga enjoyed better average tariffs - especially from the increasing long-distance travelers. Notably, the airport expressway has experienced an increase in tariffs since the change to an open system. With a recovery in traffic volume, this section saw much higher revenues.

Modest traffic volume growth
The 3.3% yoy increase in daily average traffic volume in 1H10 came from additional traffic from the new toll road sections such as the Jakarta Outer Ring Road and the Bogor Ring Road. The integration of the Jakarta Ring Road has also induced growth in the Jakarta Cikampek section, Purbaleunyi, Jakarta Tangerang. Furthermore, the airport expressway has seen a recovery in traffic volume since the change from a closed system to an open system in September 09.

Flat opex
Surprisingly, Jasa Marga booked flat opex of around Rp500bn in 2Q10. This caused the opex to sales ratio to fall to 47.5% in 2Q10 from 49.5% in 1Q10. There was a sharp increase in opex from joint operations but this was negated by a significant fall in G&A expenses, leaving the total opex relatively flat. As a result, operating income was boosted. Hence, the EBITDA margin expanded from 60% in 1Q10 to 63.3% in 2Q10. However, please note that we need to crosscheck with the company to see whether the flat opex is sustainable or not.

BUY maintained
There is a good chance that we make an upgrade due to the lower than expected tax and opex. However, we still need to make cross checks with the company. For the time being, we maintain our BUY call on the counter.

Danareksa Jasa Marga (JSMR IJ, Rp1,900 BUY) On the right road

Ratification of new land acquisition law in the pipeline
Land acquisition remains a key issue for toll road construction in Indonesia. Currently, land acquisition is based on Law No 20/1961 and two presidential decrees (No 36/2005 and No 65/2006). However, in order to provide an even stronger legal basis for land acquisition, the House of Representatives (parliament) is expected to discuss a new bill on land acquisition before passing it into law. Technically this should make it easier to revoke land owners’ land rights - although implementation is another matter entirely.

New toll road projects bode well for the future
Jasa Marga has five toll road projects in progress: the Bogor Ring Road (BORR) section 2, Semarang-Solo section 1, Gempol Pasuruan, JORR W2 North, and Surabaya Mojokerto. The construction of Semarang-Solo section 1 has already started but the other four are still in the land acquisition stage. In our view, these toll roads have the potential to generate good revenues since they are close to the main cities - meaning sufficient traffic. The concerns center on land acquisition – a time consuming process that makes the completion time of a project unpredictable. A stronger land acquisition law is key to speedier toll road development.

Pretty good 2009 results
Jasa Marga’s 2009 results are fairly good. Revenues increased 10% yoy to Rp3.7tr with EBITDA up 7% yoy to Rp1.8tr. Helping to boost the company’s performance was the 4.3% yoy higher traffic volume of 2.5mn vehicles per day. The company also booked Rp125bn in gains from asset conversion to investments in Jakarta Lingkar Barat Satu. All in all, the balance sheet remains healthy with net gearing of a moderate 48% as of December 2009.

Target Price trimmed to Rp2,300 on project delays
We slightly adjust our earnings forecast to take into account 1) the FY09 results and 2) some delays in the new toll road projects due to the protracted land acquisition process. However, our earnings changes are not significant (expect for net profits as the interest expenses shift to later years because of the project delays). Our DCF valuation gives rise to a lower TP of Rp2,300 as some projects were shifted back without any extension in the concessionary period.