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Jasa Marga & Right Issue: Opportunity!

Jasa Marga (JSMR) reported a net income of Rp849 billion during first half 2016, grew 28% over the same period of the previous year, thus JSMR becomes one of few major companies in the Indonesia Stock Exchange who still had a good financial performance in 2016 so far. But why does the stock fell instead?

When this article was written, JSMR dropped to Rp4,500’s per share, which is its lowest position in the last several years. And the cause of the fall, as you may already know, is because the company will hold a rights issue at an exercise price that is likely to be much lower than its market price.

So here’s the story. Through the program of state equity participation, the government as the controlling shareholder of JSMR will put additional capital of Rp1.25 trillion. The company itself will issue new shares worth Rp1.8 trillion, so there will be allotment of shares worth Rp550 billion for public investors (but if JSMR’s shareholders do not execute their right, the allotment will also be taken by the Government).

And based on the results of General Meeting on August 29, the Company will issue 491 million new shares. Because the value of the right issue was Rp1.8 trillion, the exercise price of the right issue would be Rp1.8 trillion / 491 million = Rp3,662 per share. Take a simple logic: Why do we have to buy JSMR at the price of 5,000, if we can buy its right later then redeem it at the price of only 3,662? So that’s why JSMR dropped, and probably will fall further in the future, but it is quite clear that it will not dropped lower than 3,662 (or if JSMR dropped lower than 3,600’s, for example if the Jakarta Composite Index/JCI slumped, then the stock would immediately rise back).

And that's because, in spite of the ‘problem’ of right issue, but JSMR is still a fundamentally wonderful company. As we’ve discussed in this article, JSMR main business is the operation of toll road that offers stable income for the long term, has a wide popularity and strong brand equity (who do not know the name of Jasa Marga?), good quality of GCG, and has good track record in payments of its bond debts. The combination of a consistent fundamental performance over the long term plus the qualitative value of the company, causing the stock to be valued at premium, that even at the price of Rp4,500 per share (it is the lowest price for JSMR in recent years, where the stock would only dropped to that position if the JCI is in a panic selling state, or if there is any other extraordinary events), the PBV is still quiet high at 2.8 times. However, when compared with the valuation of the shares of well-known big companies like Bank BCA or Astra International, the PBV of less than 3 times for JSMR is relatively cheap. You can read the explanation in here.

Meanwhile if we looking forward, JSMR also offers the prospect of a bright future. Actually, though JSMR has a fairly consistent track record of financial performance in the past, but the real growth of the company is fairly slow when compared to large companies such as Perusahaan Gas Negara (PGN), Bank BRI (BBRI), and ASII, whose their book value has grew more than 20% annually since 2008. And that's because the process of constructing a toll road is very difficult, so the length of toll road concession held by JSMR was barely growing in the past. In 2008, JSMR managed 527 kilometers of tool road in total, which increased to 555 kilometers in 2013, or grew only 28 kilometers in 5 years. As a result the company can only rely on the increase price of ticket for the existing toll roads to increase their income, so that the company's equity is only able to grow about 10% per annum.

But the negative trend is starting to change since the last two years. Starting in 2014, along with the mega-projects of infrastructure by the Government, JSMR also obtained a mandate to build and manage a lot of new toll roads, ranging from the segment of Cinere - Serpong in Greater Jakarta, until segment Medan - Tebing Tinggi in North Sumatera. Thus by the end of 2015, the length of toll roads managed by JSMR had increased to 590 kilometers, or grew by 35 kilometers in only 2 years, but it’s just the beginning! Currently JSMR is speeding the development of new toll roads, where if all goes well, the company will manage 987 kilometers of toll roads by the end of 2019. Well, sounds promising right? In fact, when the government injected additional capital worth Rp1.25 trillion to the company through a right issue, the purpose is to finance the construction of the new toll roads. Yep, in this case the government is not only supporting JSMR by taking care of land acquisition (this is the hardest part of building a toll road), but also in terms of financing. If the right issue is still not enough, then JSMR may have an option to hold an IPO for one of its subsidiaries, as had been done by several other state-owned enterprises (SOE).

Images of Toll Road Semarang - Solo, the construction is targeted to be completed in this year.

So in spite of the (temporary) decline of the stock because of right issue, but it is quite clear that JSMR still offers long-term prospects, even the decline means that we can have a good ‘start position’ at bottom price. I mean, if you buy JSMR at the price of Rp5,000 per share and sell it later at 6,000, then how big the profit? But if you buy it at the current price, or even lower, then when the stock later rose to 5,000 only, you’d already make money. Moreover, if we look at history of other SOE’s right issues, such as Adhi Karya (ADHI), Aneka Tambang (ANTM), and Waskita Karya (WSKT), the stock also dropped at first as the exercise prices of the right issue were below the market prices, but soon rose back, sometimes with an remarkable increase of 50% or more.

Thus, now I may buy this JSMR immediately? Well, wait a minute. As already mentioned above, JSMR will hold a right issue at a price of 3,600's, so it is probable that its share will drop to anywhere near 3,600, mainly because the process of the right issue would take a relatively long time from now on. Based on estimates from the company’s management, the corporate action will be completed in the fourth quarter of 2016 (around October-November). In the IDX website itself, there has been no announcement from JSMR associated to the right issue, except for the announcement of the results of its AGM.

Then what are the chances for JSMR to rise again later? Must be quite large, especially because of the theoretical price for the stock after the right issue is considerably higher than the exercise price of the rights issue itself. You see, JSMR issuing 491 million new shares, or only a little when compared to the current number of shares of the company, which is 6.8 billion. Say the average price of JSMR in the market during this time is Rp5,000 per share, which after multiplied by 6.8 billion shares, the result is Rp34 trillion of market cap. After the right issue, the number of JSMR’ shares will increase to 7.3 billion shares, and its market cap was also increased by 1.8 trillion to Rp35.8 trillion. Thus the theoretical price after the rights issue was 35.8 trillion / 7.3 billion, equal to Rp4,909 per share. See? Based on experience, when a company holds a right issue, the share price will go up or down to near the exercise price. But after the right issue is completed, the shares will return to the theoretical price, or it could be higher if the company's fundamentals are still excellent as before.

So the conclusion, JSMR is worth to buy, but currently the timing is not yet right, so hold your cash. If the downtrend of the JCI that happened since last continues, I’m optimistic that we can buy JSMR at the price of 4,000 or lower, where with a little luck, the profit would likely to reach 50% (the target price is 6,000), when JSMR rose back in early 2017.

PT Jasa Marga (Persero), Tbk
Rating of Performance in Second Quarter of 2016: A
Rating of Shares at 4,550: AA

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