Take Profit Jasa Marga (JSMR), Buy Construction names - JP Morgan

* Heavy capex cycle ahead. Toll-road regulator (BPJT) currently works hard to amend the 24 “sleeping” toll-road licences, seeking resolution to kick-start construction. Some licences could be revoked if license-holder could not meet the new terms, with automatic termination clause. This process could bring new opportunities, and threats, to JSMR.

* JORR-S legal case may re-emerge. At the time of JSMR IPO, one of the key risk disclosed in the prospectus is the unfinished legal business surrounding Jasa Marga’s JORR-S toll-road segment (Pondok-Pinang to Taman Mini, known as TB Simatupang toll-road). Industry sources said that legal actions on the matter will intensify this year, and that JSMR could be put on the spotlight. The event could remind investors of this particular legal risk on JSMR, that arguably has been forgotten by the market. The complete JORR system contributes around 16% to JSMR’s EBITDA, and JORR-S is a key component to the overall JORR system.

* Political capital of previous JORR-S owners has risen. According to the media, the consortium that previously owns JORR-S consists of Mrs. Siti Hardijanti Soeharto (Mbak Tutut), Bambang Soeroso (now DPD Bengkulu as appointee by president SBY), and Djoko Ramiadji (Mustika Ratu family, father-in-law to Mr. Hatta Rajasa’s son). The consortium lost the JORR-S during Megawati’s PDI-P government.

* Management change at JSMR in May 2011. Mr. Frans Sunito’s term as CEO is ending soon and talks of new management selection have started. Mr. Frans has been an effective leader for JSMR for many years; the new CEO may have a big shoe to fill.

* Uncompelling valuation. The stock trades on 14.1x FY11 P/E with a 22% growth forecast for FY12. Valuation is neither excessive nor compelling. Downside risk if JSMR loses the ownership of JORR-S segment. JPMorgan analyst Liliana Bambang rates the stock as OW, with PxT of Rp3600 or 9% upside. It has been a good call, but the risk-reward profile has changed.