JSMR: FY10 slightly below due to higher costs - JP Morgan

· FY10 slightly below due to higher costs. The company reported FY10 earnings of Rp1.2tr, with core income up by 38% y/y. The company’s FY10 earning is slightly below our expectation by 4% and consensus by 5% on the back of higher-than-expected costs. EBIT margin in FY10 was 45% versus our and consensus expectation of 47-48%.

· Weak 4Q10 could prompt slight downward adjustments in earnings. The company’s 4Q10 net income of Rp235bn was down by 9% y/y and 24% q/q on higher costs (both cost of revenue and SG&A). We view that our and the market would likely to adjust down their forecast to account for higher costs, by around 4-6%. The stock has outperformed the index by 3% in the last one month, and we expect the outperformance to halt post the 4Q10 earnings announcement. We are still waiting for the full detail on FY10 result to see whether or not there is one-time cost being expensed in 4Q10 that drove weak 4Q10.

· Maintain OW with Dec-11 PT of Rp3,600. Despite weak result, we maintain our OW stance on JSMR with PT of Rp3,600. We noted few positive catalysts, such as bi-annual tariff adjustments in 4Q11 and implementation of land acquisition law in 4Q11. At current juncture, the share price is trading at FY11 P/E of 15.9x and FY12 P/E of 13.0x. Stable bond yield, in our view, would bode well for JSMR.

· Key risks. (1) lower-than expected traffic volumes in new and existing toll roads; (2) lower-than expected tariff adjustments in 4Q11 (currently we expect tariff adjustment of 14%), and (3) repairs on Semarang-Solo toll road, which has not been operational, to be expensed instead of capitalized.