SBS Transit - DBS Research 2021-09-02: Refuelling For A Run; Initiate Coverage With HOLD


SBS Transit - Refuelling For A Run; Initiate Coverage With HOLD

  • Current price appears fair at 17.1x and 19.0x FY21F and FY22F earnings.
  • Revamp of Downtown Line financing framework could change profitability outlook.
  • Rail ridership recovery to take time as structural changes in work and commute take place.

Initiate coverage on SBS Transit with HOLD; target price of S$3.44 implies prospective ~14% upside.

  • We believe that SBS Transit (SGX:S61) is a HOLD at current prices. Valuation appears fair with and FY22F P/E 19.0x which is approaching SBS Transit’s 10-year mean forward P/E of 21.2x.
  • While recent developments in parliament hint at potential support for the Downtown Line, we are erring on the side of caution given the government’s outsized fiscal measures provided due to COVID-19. However, a significant revamp of the Downtown Line financing framework leading to profitability, a turnaround in rail ridership coupled with higher-than-expected fare revision, or the award of a new bus package tender will be upside to our base case assumptions.

2022 upward fare adjustment likely as cost pressures mount.

  • We believe an upward adjustment in fares is likely in the upcoming 2021 fare review exercise. Singapore’s vaccination campaign has progressed well and the economy is on track for growth in 2021.
  • In 2020, despite having a 4.4% allowable fare adjustment quantum, the Public Transport Council (PTC) recommended for fares to remain unchanged to support commuters amidst the pandemic. However, cost pressures have begun to rise with Singapore’s Consumer Price Index rising 2.5% y-o-y in July 2021 and oil prices now above pre-pandemic levels at ~US$75. Both these components can affect the formula that the PTC takes into account in its fare review exercise. As such, we are projecting fares to rise 7.0% y-o-y in FY22F, partially to make up for the unchanged fares in 2020. This would translate to a 7.3% rise in FY22F revenue to S$1,379.2m.

Revenue from higher fares will be offset by tapering of government support measures.

  • In FY20, SBS Transit received S$109.8m in wage subsidies under the Jobs Support Scheme, which helped cushion the impact of lower ridership on the group. We have forecast for SBS Transit to receive a further ~S$25m in wage subsidies for FY21F, which will similarly help mitigate the impact of COVID-19 restrictions implemented in May 2021.
  • Together with the wage support, SBS Transit's FY21F net profit is forecasted to be at S$44.7m. However, the JSS scheme is unlikely to be extended in FY22F given the improving pandemic situation in Singapore. SBS Transit will thus have to record higher ridership figures or lower costs to make up for the shortfall even as it grapples with potential structural changes in work patterns.

Sengkang - Hougang bus package likely to be retained by SBS Transit.

  • SBS Transit’s Sengkang-Hougang bus package is due to expire in September 2021 and in normal circumstances should have come up for tender. However, tenders are usually called at least 6 months before a bus package is due to expire. With less than 3 months to expiry, we believe that the lack of a tender will be in SBS Transit’s favour, as it hints at a possible extension of the bus package without a tender.

2023 to be crucial year for SBS Transit’s bus business.

  • 2023 will be an important year for Singapore’s bus operators with 7 bus packages set to expire in the year. While 4 bus packages from SBS Transit will be at risk, the group may also stand to gain if it clinches the larger bus packages of Loyang and Choa Chu Kang – Bukit Panjang, both of which involve over 30 bus services. However, until then, little developments are expected on the bus package front.
  • FY22F revenue for the bus business will likely be relatively stable, as SBS Transit only collects fares on behalf of the Land Transport Authority (LTA). In other words, the LTA bears most of the revenue risk for the bus business.

Watch for turnaround in rail ridership.

  • We will be tracking average daily rail ridership closely to determine the impact of structural changes in commuting caused by COVID-19. Total average daily ridership across SBS Transit’s train lines was at ~1.22m in FY19 compared to ~709,000 in FY20, a ~42% decline.
  • While there have been conflicting views on the future trajectory of work from home, we believe average daily rail ridership in April 2021 may provide hints on future ridership trends. In April 2021, the government had relaxed restrictions and allowed up to 75 percent of the workforce to work in office. Correspondingly, average daily rail ridership recovered to 73.9% of pre-pandemic (April 2019) levels. For FY21F, we have projected rail ridership to improve to ~810,000 before bouncing further to ~995,000 in FY22F.

Hong Kong MTR patronage may provide hints on future ridership.

  • Hong Kong has contained COVID-19 and kept daily new COVID-19 cases mostly below 10 over the past few months. COVID-19 restrictions in Hong Kong have been gradually eased and the region may offer a peek into commuting patterns in a post-pandemic world. For July 2021, Hong Kong’s Domestic Service MTR patronage on an average weekday still lies ~7% below pre-COVID levels. That said, MTR patronage still appears to be on a recovery trend.
  • Going forward, we will be tracking this metric carefully as it may offer a prelude to structural changes in commuting trends.

Downtown Line parliamentary discussion could bring reprieve to SBS Transit.

  • SBS Transit’s Downtown Line has been loss-making since it began operations in 2013. The sustainability of the train line has been called into question in parliament in 1H21 which could bring about change in Downtown Line’s business model. The Downtown Line is currently on the National Rail Financing Framework 1 (NRFF1), as opposed to other train lines, which are on NRFF 2 or 3.
  • The main difference between NRFF 1 and the later generations is the lack of a mechanism to protect against a shortfall in revenue. As a review of the Downtown Line is being conducted, any changes implemented is likely to boost the sustainability of the train line and in turn SBS Transit’s financial performance.
  • Conversely, a lack of change may signal that the fortunes of the Downtown Line may change and stabilise in future.
  • See
  • See the 25-page report attached for complete analysis on SBS Transit (SGX:S61).

Woon Bing Yong DBS Group Research | Paul YONG CFA DBS Research | https://www.dbsvickers.com/ 2021-09-02
SGX Stock Analyst Report HOLD INITIATE HOLD 3.44 SAME 3.44