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Thursday, March 10, 2011

Infrastructure Sector - PT. Jasa Marga Tbk (JSMR)

by CIMB securities

Valuation and recommendation
Among infrastructure-related stocks, Jasa Marga (due to its earnings performance and defensive nature) and most contractors (due to under-ownership, less liquidity) had outperformed the index in the past 12 months. Cement stocks weakened in 2H10 due to declining rates of growth in cement volume. In our view, the sell-off was rather excessive, particularly given their resilient margins that should contribute to earnings despite some volume weakness.

Maintain Overweight on infrastructure sector as the sector’s earnings growth will likely exceed the JCI’s this year. Fundamentals are unchanged, though there could be near-term pressure from rising oil prices, as proven historically. Toll-road operators like Jasa Marga should hold their ground, despite the threat of higher investment costs. Cement stocks such as Indocement should benefit from both price increases and a demand boost. However, with the threat of inflation this year, we suggest that investors look at Semen Gresik, the resilient cement producer, aside from Indocement.


Maintain Outperform on Jasa Marga. If the three events expected in 2011 meet their deadlines, the major beneficiary would be Jasa Marga. The company has stakes in six projects (two partly delivered this year) that have been stalled by slow land acquisition. The company’s interest in three other projects could also benefit this year from land reforms. Jasa Marga typically benefits from higher inflation with its defensive vehicle volume. We have a higher target price of Rp4,550, still based on DCF (WACC 10-10.3%) after upgrading our earnings forecasts for higher inflation and lower debt assumptions.

Maintain Outperform on Indocement. Being the leader in Java’s cement market, the company should benefit from infrastructure project acceleration. It has spare capacity to raise production and effective cost management so that it may not need to raise selling prices as quickly as its competitors. We maintain our target price of Rp21,500, based on 15.6x CY12 earnings, in line with the market.

Maintain Neutral on Semen Gresik. Historically, Semen Gresik is the pick during inflationary periods given its resilience and defensive geographical profile. Downside risk is that Semen Gresik’s capacity is closer to 100% today than in 2005 or 2009, necessitating higher selling prices. Having said that, higher energy costs could serve as an opportunity for it to raise prices and improve its revenue growth, though at the cost of market share. We maintain our target price of Rp10,500, at 14.0x CY12 P/E.

Maintain Neutral on Holcim. Despite its volume spurt in Jan 11, spare capacity is not as abundant in absolute terms so that it may need to raise prices earlier than Indocement. Margin expansion and higher growth than peers have been priced in, we believe. We maintain our target price of Rp2,500, based on 13.7x CY12 earnings.

JSMR: First Few Years Are the Hardest

• Maintain Outperform with higher target price of Rp4,550 (from Rp4,450, unchanged WACC 10-10.3%) following our earnings upgrade of 1-13% for FY10-12 as we take into account higher FY11 inflation and lower debt withdrawn. Jasa Marga should be a major beneficiary of Indonesia’s land-acquisition law as well as the deadline for the re-evaluation of stalled toll roads in 1Q11. The company has two projects under re-evaluation. Meanwhile, resilient traffic during high oil prices and formulated tariffs are benefits. Under these circumstances, we expect Jasa Marga to continue its earnings growth and return to outperforming the market.

• Survivor of high inflation. We raise our earnings assumptions by taking into account FY10 inflation of 6.9% (from 6.5% assumption) and FY11 of 7.2%. Tariff adjustments for most of the toll roads under Jasa Marga at the end of this year should serve as catalysts, we believe.

• Lower debt. The company possibly ended FY10 without adding new debt (vs. our estimate of Rp2tr). It may withdraw a maximum of Rp1.4tr in FY11. As a result, there is immediate lower interest expense in FY11-12 which should boost earnings. On the other hand, as interest rates rise, there is a chance that Jasa Marga’s interest cost could trend higher.

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