SBS Transit - RHB Invest 2021-05-05: Proxy To Normalisation Of Life In Singapore

SBS TRANSIT LTD (SGX:S61)

SBS Transit - Proxy To Normalisation Of Life In Singapore

SBS Transit is a leading public transport operator in Singapore;
Proxy to ongoing recovery in Singapore’s public transport ridership;
Long-term beneficiary of Singapore’s public policy that favours public transport over private vehicle ownership;
Potential earnings uplift from favourable changes to the financing framework for the Downtown Line (DTL);
Strong positive FCF generation, high dividend yields;
SBS Transit is trading below its 5-year mean of 12.6x.

SBS Transit (SGX:S61) is one of two multi-modal public transport operators in Singapore. This largest public bus operator in Singapore was established in 1973 through a merger of three private bus companies – Amalgamated Bus Company, Associated Bus Services and United Bus Company – as part of a government-led initiative to improve the service standards of the bus transport system.
SBS Transit is 74.4%-owned by ComfortDelGro (SGX:C52), and has been listed on the SGX since 1978. It has two main business segments:
1. public transport services (71% of 2020 EBIT), and
2. other commercial services, which comprise advertising and rental income (29% of 2020 EBIT).

Amid a gradual relaxation of restrictions that were put in place during the “circuit breaker” (CB) period in 2020, public transport ridership has steadily improved – SBS Transit’s rail ridership for Mar 2021 was at about 3.5 times of the lowest levels recorded in May 2020.
While the rail ridership is only 4% below Mar 2020 levels, it was still 28% below the numbers recorded in Mar 2019. Based on our readings across mobility data from Google and Apple, we note that the number of visits to public transit facilities and work places are getting closer to pre-pandemic levels. Given Singapore’s strong control over COVID-19 infections and its rapid vaccination drive, we believe public transport ridership in Singapore could return pre-pandemic levels in 2022.

The DTL has been losing money for a long time now, as ridership has historically fallen short of the projected numbers. Revenue was also impacted unfavourably, in years when the public transport fares were lowered. In addition, under the first version of the new rail-financing framework (NRFF1), SBS Transit has to pay a fixed annual licence fee to operate the DTL. Singapore’s Transport Minister Ong Ye Kung, at the Ministry of Transport Committee of Supply Debate 2021, suggested the need to review NRFF1. The framework was refined in 2016 to include greater risk-sharing between the Government and operator when SMRT Corp’s operations were transitioned to NRFF2.
SBS Transit’s other mass rapid and light rapid transit lines were transitioned to NRFF 2 in 2018. The financing framework for the DTL could be transitioned to NRFF2, as it would synchronise the DTL’s operating model with other lines that are run by SBS Transit. We assess that a breakeven point for DTL in 2021 could translate into a 250-300bps uplift in EBIT margin. Everything else being equal, this could lift profit by ~20-25%.

To meet the increase in travel demand in future, the Singapore Government aims to ensure that a higher proportion of the nation’s travel needs are met by public transport.
A key goal is to ensure that 75% of peak-hour trips are made using public transport by 2030. This number sits at 67% as of now. To promote public transport as a preferred mode of getting from place to place, the Government plans to invest more than S$60bn over this decade to expand and renew the rail network.

SBS Transit’s 2020 revenue declined by 15% y-o-y to S$1,231m amid:
1. a significant drop in ridership and operating mileage,
2. rental rebates given to tenants, and
3. reduced advertising turnover.
Thanks to the government grants that cushioned the adverse financial impact of COVID-19 and tax credits given for 2020, SBS Transit’ PATMI dropped by only 2.9% y-o-y to S$79m. Its 4Q20 net profit of S$27.1m reflected a growth of 40% q-o-q or 65% y-o-y.

For 2020, SBS Transit did not announce an interim dividend. As the outlook remains uncertain, it was prudent in paying dividends, and cut the payout ratio to 25% of profit. It announced a first and final dividend of 6.3 cents (total dividend for 2019: 13.05 cents), implying a yield of 2.1%.

SBS Transit is a professionally run company. CEO Cheng Siak Kian first joined the company in Sep 2015, and has been the occupying senior management positions in the company since Jul 2019. He was appointed as the acting CEO in Mar 2020. The heads for bus and rail have been with the company since 1996 and 2003. SBS Transit has dedicated senior management personnel assigned to each of its key business operations, eg the bus operations, bus engineering, mass rapid transit/light rapid transit lines, and rail engineering.

A recovery in public transport ridership over next 12 months and a likely earnings uplift stemming from a favourable change in the DTL’s operating model should boost our confidence on SBS Transit undergoing a positive rerating over the next 12 months. Higher dividend payout ratios should also return, when earnings grow again.
See
Key risks are:
- The slow pace of rail ridership recovery,
- SBS Transit losing market share in the public bus segment, and
- a faster-than-expected hike in operational costs.
SBS Transit (SGX:S61) is one of the Top Singapore Small Cap Companies highlighted in RHB's 20 Jewels 2021 Edition.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2021-05-05

SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000