Unseen Market Potential Unleashed

On February 12, 2024, GGRM, in a strategic partnership with PT Suryaduta Investama, which holds a 69.29% share in GGRM, unveiled a groundbreaking venture into the infrastructure sector by establishing a new subsidiary named Sapta Agung Tol (SSAT). Yes, you read that correctly - a tobacco giant is now venturing into toll roads, hot on the heels of its foray into developing Kediri Airport.

The establishment of SSAT as a Toll Road Business Entity (BUJT) marks a significant milestone in GGRM's ambitious toll road project development plan. According to Director and Corporate Secretary of Gudang Garam, this strategic move is designed to complement GGRM's existing operations without impacting its financial health or operational efficiency.

SSAT is capitalized with a substantial base of IDR 5 tn, of which IDR 2 tn has been paid up, split between GGRM and Suryaduta Investama. The division of this investment sees GGRM holding a dominant 99.99% stake, while Suryaduta Investama contributes 0.01%.

If this venture truly takes off, who stands to benefit? Naturally, the spotlight falls on JSMR, the toll road operator with the largest market share. Our analyst, Niko, just released a report on February 13th delving into this very question. Let's explore the prospects for JSMR in light of this development.

Our analyst Niko identifies an intriguing potential upside that has yet to be fully accounted for—namely, the opportunities arising from partial divestment and the exclusion of capital expenditure. These strategic financial maneuvers could unlock significant value, potentially enhancing JSMR's financial flexibility and operational efficiency.

Firstly, JSMR is contemplating a divestment of 35% of their ownership in the Trans Java Toll Road (JTT), a move that could potentially generate up to USD 1 bn in funds. This significant transaction is anticipated to occur in 2024. The JTT is described as a network of six toll roads spanning a total length of 424 km, representing a substantial portion of the company's assets at 24%. This deal is expected to yield an IRR of 13%.

Salim Group is reportedly interested in the bidding for this project. Speculation suggests that the transaction could reach a valuation of 2.5x PBV, yet Niko proposes that the deal might be valued at around USD 750 mn with 1.95x PBV, based on similar transactions.

Source: Sucor Research

Should the Salim Group's involvement come to fruition, it would significantly bolster JSMR's standing in the infrastructure industry. Leveraging the financial capacity and strategic influence of the Salim Group, JSMR could utilize the fresh influx of funds to expedite the development of five new toll roads, potentially reducing its debt in the process.

Conversely, Salim Group stands to benefit from expanding into the toll road infrastructure sector, aligning seamlessly with their extensive diversification portfolio and long-term growth strategy.

Secondly, JSMR is currently in the midst of constructing five new toll roads, with a designated capex of IDR 85 tn, of which they are responsible for funding 68%.

Our analyst suggests that the current intrinsic value analysis, which includes the development of the five toll roads by the company, might not be entirely accurate due to the inclusion of an excessive capex of 323% and invested capital of 34% associated with the five new toll road projects. By isolating the costs related to these new toll road projects from the estimates, analysts can provide a more accurate depiction of the company's intrinsic value, focusing solely on assets that are already generating revenue. The five toll roads, still in the development phase, are not yet productive and thus may skew the overall financial analysis.

The current intrinsic value estimate stands at IDR 6,025/s, based on the assumption that the JTT transaction has not yet occurred and includes the capex for the five new toll roads. However, our analyst has recalculated by excluding the capex from these five new projects, resulting in a revised intrinsic value estimate of IDR 7,175/s. This adjustment reflects considerations such as an annual toll rate adjustment of 3.5%, a yearly traffic increase of 1%, and the expectation of sustained terminal growth in the future.

Source: Sucor Research

The intrinsic value is also influenced by the prospects of the JTT share sale. Assuming that the deal goes through in early 2024, an estimated reduction in EBIT of IDR 800 bn is anticipated, equivalent to 16% of JSMR's total EBIT. However, this decrease is offset by a 15% reduction in interest expenses, granting the company financial flexibility to invest in new toll road projects without the need to increase debt.

Considering the potential arising from GGRM's venture into infrastructure and the recalculated intrinsic value of JSMR, we hold a positive outlook on JSMR's future prospects. Therefore, we recommend a BUY for JSMR, setting a target price at IDR 6,025.