Jasa Marga: Higher Capital Expenditures And Potential Regulatory Changes Are Key Risks – PT Jasa Marga (Persero) Tbk (OTCMKTS:PTJSY)

Elevator Pitch

I assign a “Neutral” rating to Indonesia-listed toll road operator PT Jasa Marga (Persero) Tbk (OTCPK:PTJSY, OTCPK:PTJSF, JSMR:IJ). The company’s current forward P/E and EV/EBITDA multiples are slightly below five-year historical averages, and this is justified on the basis of possibly elevated capital expenditures going forward and potential regulatory risks relating to future tariff hikes.

On the flip side, Jasa Marga is expected to deliver strong organic growth in FY2020, driven by new toll roads, tariff hikes and improved cost efficiency, with the market consensus expecting the company’s revenue and EBITDA to grow by +21% and +24% YoY respectively this year. If Jasa Marga is involved in the construction of a significant portion of the 1,500 km of new toll roads expected to be built in the next five years, the company’s capital expenditures are likely to remain elevated, which will offset its organic earnings growth with increased depreciation and interest expenses.

Readers are advised to trade in Jasa Marga shares listed on the Indonesia Stock Exchange with the ticker JSMR:IJ, where average daily trading value for the past three months exceeds $1.5 million and market capitalization is above $2.5 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, and Charles Schwab, or local brokers operating in their respective domestic markets.

Company Description

Started in 1978 and listed on the Indonesia Stock Exchange in 2007, Jasa Marga is Indonesia’s largest toll road operator with a 60% market share in terms of operated commercial toll road length. Being 70%-owned by the Indonesian government, the company is primarily engaged in the construction, operation and maintenance of toll roads, and it has 33 toll road concessions with a total length of 1,527 km as of end-September 2019.

Location Of Jasa Marga’s Toll Roads

(Source: Jasa Marga’s 9M2019 Corporate Presentation)

Increased Financial Leverage And Capital Expenditures In The Past Few Years

Jasa Marga currently trades at below-historical average valuations. The stock trades at 18.4 times consensus forward next twelve months’ P/E and 9.4 times consensus forward next twelve months’ EV/EBITDA. In contrast, the company’s historical five-year average forward P/E and EV/EBITDA multiples are 19.3 times and 10.7 times respectively.

The company’s below-historical average valuations are largely due to increased financial leverage and capital expenditures in the past few years, as per the tables below. It is estimated that 941 km of toll roads were built during Indonesian president Joko Widodo’s first presidential term between 2014 and 2019, as the infrastructure budget was increased from IDR155 trillion in 2014 to IDR410 trillion in 2018. The length of Jasa Marga’s toll roads under operation increased from below 600 km in 2016 to 1,041 km as of end-9M2019.

Jasa Marga’s Increased Financial Leverage And Capital Expenditures Since 2015

(Source: Jasa Marga’s 9M2019 Corporate Presentation)

Looking ahead, it is expected that based on the company’s toll road projects in the pipeline, its capital expenditures should peak in 2020 and start to decline from 2021, which should be a positive catalyst for the stock. However, there are concerns that a new capital expenditure cycle could start again with Indonesian president Joko Widodo being elected for the second five-year term in October 2019. According to a statement by Deputy Public Works and Housing Minister Wempi Wetipo in November 2019, an estimated 1,500 km of new toll roads is expected to be built in the next five years to improve connectivity in the country. If Jasa Marga is involved in the construction of a significant portion of these toll roads, it could potentially imply that the company’s capital expenditures remain elevated.

Jasa Marga’s Upcoming Toll Road Projects

(Source: Jasa Marga’s 9M2019 Corporate Presentation)

Potential Regulatory Risks In The Spotlight

Jasa Marga’s share price declined by -21% from IDR5,800 as of October 29, 2019 to a low of IDR4,590 as of November 28, 2019, before recovering to close at a share price of IDR5,175 as of January 17, 2020.

Jasa Marga’s Three-Month Share Price Chart

(Source: GuruFocus)

According to a CGS-CIMB sell-side report (not available for download in the public domain) titled “Talks of tariff intervention unfounded” published on November 13, 2019, speculation over changes to the bi-annual toll road tariff hike was responsible for Jasa Marga’s share price weakness. There were local media reports published in November 2019 which made reference to an old petition for judicial review of toll road concession regulation demanding that tariff hikes should not be allowed for toll road concessions which have already reached the breakeven point.

Under current regulations, an initial tariff for a toll road is stipulated in the toll road concession agreement prior to commencement of construction and calculated based on multiple factors, such as toll road users’ ability to pay, investment feasibility and cost savings for vehicles. As regulated by law, there is a mandatory adjustment to tariffs every two years, which is determined based on the regional Consumer Price Index.

There are certain circumstances where the bi-annual toll road tariff hike can be either delayed or prohibited. For example, the Minister of Public Works could choose to postpone the bi-annual toll road tariff hike for a particular toll road concession if that specific toll road does not meet minimum service standards. Also, toll road tariff hikes are not allowed for existing toll road concessions which have expired and subsequently received extensions of their operating periods approved by the Indonesian government.

There is nothing to suggest that the Indonesian government will make any changes to the current bi-annual toll road tariff hike mandated by law. Also, Jasa Marga has a total of 33 toll road concessions, and 14 of them will expire the earliest in 2044, as per the table below. In other words, Jasa Marga’s toll roads should continue to benefit from tariff increases every two years as per the current practice.

Jasa Marga’s Toll Road Projects In Terms Of Length And End Of Concession Period Date

(Source: Jasa Marga’s 9M2019 Corporate Presentation)

Nevertheless, the recent share price weakness and local media reports have put regulatory risks for the Indonesian toll road sector and the company in the spotlight. Given that Jasa Marga is a state-owned enterprise which is 70%-owned by the Indonesian government and toll roads are regulated monopolies, new regulations which have a negative impact on the Indonesian toll road sector are a key risk factor for the company.

Strong Organic Growth Expected For FY2020

Jasa Marga’s revenue and EBITDA were up +11.6% and +16.9% YoY at IDR7.96 trillion and IDR5.00 trillion respectively for 9M2019. Going forward, market consensus expects the company’s revenue and EBITDA to grow by +21% and +24% YoY respectively in FY2020. It is expected to deliver strong earnings growth on the back of multiple growth drivers.

Firstly, several new toll road projects are expected to completed by end-2019 and 2020, which will contribute to higher revenue and earnings for Jasa Marga. These new toll road projects that should commence operations in the near term include the 36.4 km Jakarta-Cikampek II Elevated toll road (99% construction completion progress as of October 25, 2019), the 99.35 km Balikpapan-Samarinda toll road (97% completed), and the 39 km Manado-Bitung toll road (52% completed), among others.

Secondly, as highlighted earlier, there is a mandatory adjustment to toll road tariffs every two years determined based on the regional Consumer Price Index. Given that Jasa Marga’s toll roads have different (staggered in a way) concession period commencement dates, it implies that the company benefits from steady revenue growth driven by mandatory toll road hikes on a regular periodic basis.

Thirdly, Jasa Marga has a target of cutting its current workforce by two-thirds in the medium to long term, which implies approximately 2,800 employees in the future versus 8,400 employees currently. Since the company implemented cashless toll collection systems in the past few years, the number of employees has decreased from 9,800 as of end-2014 to 8,400 at the end of 2018. General & administrative expenses as a percentage of revenue has declined from 8.9% in 2014 to 3.2% in 2018.

Valuation

Jasa Marga trades at 19.4 times trailing twelve months’ P/E and 18.4 times consensus forward next twelve months’ P/E based on its share price of IDR5,175 as of January 17, 2020. The stock’s forward next twelve months’ P/E represents a slight discount to its historical five-year average forward P/E of approximately 19.3 times.

The company is also valued by the market at 11.3 times trailing twelve months’ EV/EBITDA and 9.4 times consensus forward next twelve months’ EV/EBITDA, versus its historical five-year average forward EV/EBITDA of approximately 10.7 times.

The company offers consensus forward FY2019 and FY2020 dividend yields of 1.0% and 1.2% respectively.

Risk Factors

The key risk factors for Jasa Marga are new regulations which have a negative impact on the Indonesian toll road sector and the company, higher-than-expected capital expenditures, lower-than-expected organic growth, and higher-than-expected interest rates.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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