Jasa Marga (Persero) (JSMR.JK) Paving the Way for Growth; Land Acquisition Bill a Key Catalyst - Cititgroup

 Raising target price; Maintain Buy — We raise our target price on Jasa Marga
(JSMR) to Rp4,000 (from RP2,340) following: a) Upward earnings revisions to factor in higher tariffs, higher volumes, and lower costs; b) Changes in our WACC assumptions (to better reflect current market conditions); and c) Roll forward of valuation to June 2012E (from Dec 2011E). While of late the share price has been range-bound, we believe the land acquisition bill due to be passed in Jul/Aug 2011 could serve as a key catalyst. This, and robust revenue growth, lead us to maintain our Buy (1L) rating.
 Valuation — While a DCF-based NPV of Rp6,141/sh makes JSMR appear sharply undervalued, this relies on timely completion of future projects. We prefer to rely on the near-term instead, using a multi-stage P/E model (15.6x 12E) which yields a Rp4,000 TP.
 2011 tariff hikes — 12 of the JSMR roads have biennial CPI-based tariff djustments due in Sept. However, since the increase is effective in Sept-2011, the full impact would only be felt in 2012. We expect to see FY11 tariffs rise by 1.7% and 10.3% in FY12.
 Hitting the 1bn mark! — In 2011, we expect JSMR to achieve traffic volume of .07bn vehicles (+11.4% YoY). Key reasons: a) Given the limited alternative options for travelers, we don’t expect traffic levels to be impacted by the planned tariff hikes; b) Operations of two new routes (Surabaya-Mojokerto Section 1A & Semarang Ungaran); c) Historically, a rising car sale environment bodes well for JSMR.
 Land acquisition bill: Positive for Medium & Long Term — Difficulties in acquiring land has been a hindrance to toll road development in Indonesia . As GoI looks to pass the land acquisition bill, we believe this will provide better clarity on procedures and timing, leading to a faster realization in the rate of return of toll road co’s (incl. JSMR). Bill finalization is being deliberated and it is targeted to be passed in Jul/Aug 2011.
 Risks — a) Change in GoI regulatory framework (i.e. tariffs), macro, and political conditions; b) Delays in completion of ongoing projects; and c) Rising interest rates).