Jasa Marga Downgrade to Neutral due to short-term uncertainty - JP Morgan

• Short-term uncertainty: Mr. Frans S. Sunito has served as JSMR’s president director for two terms, which renders him ineligible under Indonesian SoE rules to seek re-election at the upcoming AGM. The new president director will be announced in mid-June. The current management, in our view, has been able to select attractive toll road concessions. We believe there is a risk of a change in strategic direction or toward more aggressive toll road acquisitions from other toll road operators. We believe that this may not be fully priced in at this time,
and would be reluctant to add new positions to the stock.
• Long-term fundamentals are unchanged: We remain favorable on the toll road industry in Indonesia as we expect faster progress on the back of the new land acquisition law (which should enable faster land acquisition for public use of land). We believe JSMR's ROE trajectory also remains on the upside on the back of tariff increases and cost discipline.
• Slightly reduce FY12E earnings by 5% to account for IFRS accounting: We adjust FY12 estimates to expense deferred overlay charges under proposed IFRS accounting, which was previously amortized over two to three years (which accounts for around Rp250-300bn of annual expenses). Our FY12 estimate is currently 5% below the
consensus estimate.
• Downgrade JSMR to Neutral: Due to the short-term uncertainty, we downgrade JSMR to Neutral from OW with a Dec-11 PT of Rp3,450 (from Rp3600), after accounting for our 5% EPS downgrade. We would turn more favorable on the company if the strategic direction does not change. Land acquisition law could provide upside risks. Key risks to our PT and earnings are: (1) lower-than-expected tariff increases, (2)
higher-than-expected salary cost increases.