SBS Transit Stock Review: Should I Invest?
Updated: May 20, 2020
This post was originally published on 15 March 2020 but some revisions have been made to include updates from SBS Transit's annual report FY19. From time to time, I may edit this post should I find any significant changes to the company. To make it simpler for readers, I have denoted the changes with an asterisk '*'.
SBS Transit (SGX: S61), previously known as Singapore Bus Services, was established even before I was born and subsequently re-branded in 2001 into the company we know today. Fun fact: Something SBST has in common with their parent company, ComfortDelgro (Singapore's largest taxi operator), is that SBST is Singapore's largest bus operator.
At the point of writing, SBS Transit is currently trading at a share price of $2.84 with a P/E ratio of 10.7 and a dividend of 4.2%. So, is it a bargain? Let's look further.
Investors who had invested in SBST 5 or 10 years ago would have 64% profit gained. As for Year To Date (YTD), its share price has dropped 30%.
Net income and free cash flow
Net income and free cash flow negative haven't been pretty for SBS Transit until 2016. In 2014, Land Transport Authority (LTA) introduced Bus Contracting Model (BCM) which was to buy over all of their assets (buses, depots etc) and then leased back SBS Transit. Under the new scheme, it is evident from the chart that SBS Transit benefited greatly.
Debt levels and ROE
SBS Transit's current ratio is actually below 1 compared to ComfortDelgro's current ratio of 1.18. Maybe low current ratio is the norm for transportation industry. Nonetheless, I believe it is less of a concern as bus is an essential mode of transportation for daily commuting. No matter the economic condition, commuters still have to get from one place to another unless there is a black swan event such as COVID-19.*
As for their long term debt, it is almost 0.
Return on Equity (ROE) is close to 16% which puts SBST well above the industry ROE of 8.1%. This figure was based on a report from Statistics Singapore dated 2017. Unfortunately, it seems that there isn't any new report since then so do take it with a pinch of salt.*
Here are some really cool stats from the Singapore Department of Statistics (DOS) on the public transport ridership. Based on the chart, ridership for MRT and bus have been going up for the past 10 years. Considering that SBS Transit currently has 61% and 36% of market share for bus and MRT respectively, they are pretty well positioned to capture further ridership growth.
On top of the growing ridership, once in a while the Public Transport Council (PTC) would review the transportation fares and adjust accordingly. It ensures the sustainability of our transportation systems while it remains affordable for commuters. This inflationary component also defines SBST as a great long term investment.*
SBS Transit has a better track record in terms of improving their train line reliability over the years compared to SMRT. Though, SMRT had recently caught up with SBST. Having a high Mean Kilometer Between Failure (MKBF, another naming convention) and good track record might help SBST in securing new train packages.
As for buses, there is little information available on frequency of bus breakdown or accident but I believe the reliability of SBST buses has been top notch. Since my last encounter of a breakdown while being on a SBST bus, it has been quite many years experiencing another breakdown.*
Downsides of Bus Contracting Model*
Evidently, BCM is a huge cost benefit to bus operators as it offsets the huge initial capital investments needed to purchase new assets* which SBST's cash flow clearly demonstrated. Well, you can't call yourself a bus operator without any buses right? Despite BCM's advantages, it also lowers the entry barrier for new or smaller operators to join the bus space* for e.g. GoAhead and Tower Transit.
From my knowledge so far, the two new operators haven't been doing well. People within the industry are already assuming that GoAhead and Tower Transit wouldn't be around for long. Perhaps years of experience operating in Singapore that SBST accumulated does constitute as a significant advantage over the newer players.*
Another (small) downside of BCM would be the mixing up of bus fleet. Just a quick example, in the past, SBST owns a huge fleet of Volvo chassis double deck bus. SMRT, on the other hand, possessed MAN chassis double deck bus. It had been like this for many years so technicians on both sides are experienced in maintaining/repairing their respective fleet. The problem arrived when LTA bought back the buses and redistributed evenly among the operators. Everyone has a mixed types of buses which gave technicians a headache. In the short term, downtime for buses may increase resulting in loss of opportunity cost.
It feels kinda awkward discussing whether SBS Transit is a bargain when so many other stocks were also sold down after the huge market mania.
Anyway, Land Transport Guru has provided a list of upcoming route packages which SBS Transit may have a chance at being awarded. In case if anyone who doesn't understand the importance winning more route packages, the equation is simply: more routes = more ridership = more revenue.*
Nevertheless, do keep in mind that it is a double-edged sword as LTA may choose to diversify and reduce concentration on a single bus operator*.
Overall, SBS Transit is a straightforward and resilient business.
Like every other businesses, SBST is not spared from disruptions caused by COVID-19 either as Singapore placed itself under circuit breaker to prevent the spread. Therefore, do expect Q1 performance to be impacted and business should recover in Q2.*
So back to the golden question, is SBS Transit a bargain?
I think it is a good "buy and forget" stock due to the defensive nature of its business and it also provides a decent 4.2% dividend. However, do remember that market can undergo illogical selling in times of uncertainty. What's cheap today may become cheaper.*
For those with limited funds like myself, we have to be really thoughtful of what we buy. In order to greatly capitalize this market opportunity, we should choose stocks that can recover the fastest within a short period of time. Hence, I don't think SBS Transit falls into this category.
My 2 cents
Disclaimer: The information listed here are strictly my personal opinion. It does not constitute as investment advice. Please do your own due diligence.
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