Jasa Marga ▲ Limited downside - Upgrade to Overweight - JP Morgan

• Upgrade to Overweight from Underweight, with a new Dec-11 price target of Rp3,600: JSMR has underperformed the JCI index by 10% in the past three months, bringing down its valuation to reasonable levels, in our view. The stock is currently trading at 14.5x our FY11E P/E and 11.9x FY12E P/E. We upgrade the stock to Overweight and increase our price target from Rp2,900 (Jun-11) to Rp3,600 (Dec-11) as we upgrade EPS and roll-forward our PT. Our new price target is based on 34-year DCF, with a WACC of 12.9% and a terminal growth of 0%.

• Downside is limited: While the yield on the 10-year government bond is currently hovering around 8.7%, we estimate that the stock is currently pricing in a risk-free rate of 11%. We see this as excessive and higher than where we think nominal yields could sustain even if factoring in a further 1-1.5% rise in the CPI. Further, we note that JSMR’s earnings are positively leveraged to inflation, hence less negative earnings revision risk.

• Land acquisition law could potentially add 10% upside: Successful implementation of the proposed land acquisition law, which would ease the procedures of acquiring land for the infrastructure sector, could potentially add another Rp300-350 (up to 10% upside potential) to our DCF fair value.

• Raise our FY11E and FY12E earnings by 8%: We change the percentage of tariff hike increase for JSMR from 10% in FY11-12 to 14% in FY11 and 11% in FY12 as we factor in higher inflation. Every
1% increase in tariff hike in 3Q11 would increase our earnings estimates for JSMR by 2%. Key risks to our price target include: (1) lower-than-expected traffic volumes in new and existing toll roads; (2) lower-than-expected tariff adjustments and traffic.