JSMR Upgrading to OW, factoring in the land acquisition law - JP Morgan

· JSMR’s 1H11 was better than we expected on costs: JSMR’s 1H11 earnings grew by 16% y/y to Rp751B, 7% better than our and consensus expectations due to benign costs, particularly wages. Salary costs in 1H11 were 12% lower than our estimate; hence the company’s EBIT margin of 52% was higher than our estimate of 48%. As a result, we raise our earnings estimates for JSMR by 9%-10% for FY11-12.

· Less concerned about management continuity risk now; we turn positive: With the incumbent President Director maintaining his position for another year, we see a firm commitment from both the company and the government to toll road progress. We believe that the next important step is the passing of the land acquisition law.

· Pricing in the land acquisition law, we upgrade the stock to OW: In view of JSMR’s management continuity coupled with the possible passing of the land acquisition law in 4Q11-1Q12, we include three of JSMR’s concessions, Cengkareng-Kunciran, Kunciran Serpong, and JORR W-2 North, in our DCF valuation of the stock. These toll road concessions are located in strategic areas of Jakarta, yet the development has been hampered by the difficulty in land acquisition in the densely populated Jakarta. We believe that these toll roads are a priority for both Jakarta municipal government and JSMR. We upgrade JSMR to Overweight from Neutral and raise our PT (Jun-12) to Rp4,500 (DCF-based, WACC: 12.7%). At our PT, JSMR would trade at an FY12E P/E of 17.2x. JSMR is trading in line with the average one-year forward P/E of 15.6x; hence, we believe the land acquisition reform has not yet been priced in.

· Key risks to PT: (1) Without the passing of the new land acquisition law, we believe JSMR would be fairly valued at Rp3,900; (2) a watered-down land acquisition law; and (3) poor execution of its toll road projects.