March 11, 2025

Toll Roads for The Price of a Bike

Market Commentary

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A sharp decline in the S&P 500 Index could push the Federal Reserve toward cutting interest rates sooner than expected. A falling stock market erodes household wealth, dampening consumer spending and confidence, which are crucial for economic growth. It also tightens financial conditions, raising borrowing costs for businesses and consumers, potentially slowing investment and hiring.

If market turmoil signals a weakening economy, the Fed may shift its focus from fighting inflation to supporting growth. Investors anticipating rate cuts could further pressure the Fed to act. Additionally, a prolonged downturn might trigger credit market stress, increasing liquidity risks that the Fed would want to contain.

Ultimately, if the market correction deepens, the Fed may intervene with rate cuts to stabilize sentiment, ease financial conditions, and prevent broader economic disruption. However, if the downturn remains mild and economic data stays strong, they may hold steady.

S&P 500 Index

One of the stocks that we believe would benefit from this possible rate cut in the future is Jasa Marga (JSMR). JSMR share price has a strong negative correlation with Indonesia's 10 year government bond. We believe this correlation was due to JSMR's floating debt which currently comprise c. 55% of JSMR's total loan.

JSMR Share Price Performance Vs. Indo 10 Year Bond Yield

JSMR reported a robust net profit of IDR 1.2tn for 4Q24, marking a significant 51% YoY and 30% QoQ increase. This performance was primarily fueled by reduced provisions for toll road overlays, which decreased by 18% YoY and 47% QoQ, alongside a 22% YoY and QoQ decline in maintenance costs. Excluding a one-time gain from the RDPT buyback, the core profit grew by 36% YoY to IDR 3.7tn, bolstered by strong revenue growth and effective expense management, surpassing both consensus and our expectations.

A special 35% increase in toll fees in 2024 further propelled toll revenue by 23% YoY. The adjustment of toll fees has been a significant contributor to revenue growth, with a CAGR of 9.6% over the last five years.

JSMR is currently undertaking the development of five new toll roads in Java, which will extend the total operated toll length by 433km, or 25%. These projects are expected to be completed by 2031, with an estimated total project cost of IDR75tn and an annual capital expenditure allocation of IDR 10-12tn.

For2025-2026F, we forecast core profits of IDR 3.9tn (+5% YoY) and IDR 4.4tn (+14% YoY), driven by adjustments in toll fees, increased traffic from newly operational toll roads, and stable cost management.

Therefore, we maintain our BUY recommendation with a TP of IDR 7,000, implying 13.1x and 8.3x 2025F PE and EV/EBITDA.

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