SBS Transit Stock Review: Should I Invest?
Updated: 3 days ago
SBS Transit (SGX: S61), previously known as Singapore Bus Services, was established before I was even born and subsequently rebranded into the company we know in 2001. Something they have in common with their parent company, ComfortDelgro, is that SBST is the largest operator in Singapore for bus.
SBS Transit dropped to 52 week low of $2.86 per share with a P/E ratio of 12.4 and a dividend of 3.6% at the time of writing this. So, is it a bargain? Let's look further.
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.
SBS Transit's current ratio is below 1 compared to ComfortDelgro's current ratio of 1.18, we can assume that low current ratio is normal for the transportation industry. It should not be a concern because of the defensive nature of their business where majority of people rely on public transportation daily, makes up for the low current ratio. As for their long term debt, it is almost 0.
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.
SBS Transit has a better track record in terms of improving their train line reliability over the years compared to SMRT. Having a high Mean Kilometer Between Failure (MKBF, another naming convention) might help them in securing new train packages.
With regards to buses, there is little information on bus breakdown or accident frequency. Despite so, it has been quite some years since I last encountered a SBST bus breakdown.
It feels awkward to be discussing about whether this is a bargain when so many other stocks are on a bargain 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. Still, it can swing either ways because LTA may choose to diversify by not too concentrated on one operator.
BCM offsets the huge initial capital investments needed to purchase new assets which allowed SBS Transit to have positive free cash flow. Well, you can't call yourself a bus operator without any buses right? However, it lowers the entry barrier for new or smaller operators to join the competition such as GoAhead and Tower Transit. From what I know, these two new operators have not been doing well so people are expecting LTA would not renew their contract with them.
Another downside to this BCM would be the mixing up of bus fleet. Previously, just a quick example, 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 buses. The problem comes when LTA bought back the buses and redistribute them evenly among the operators. Now, everyone has a mixed types of buses which gave technicians a headache. In the short term, downtime for buses may increase which results in loss of opportunity cost.
Overall, it is a straightforward and resilient business.
Although bus is an essential mode of transportation for everyone, with COVID-19 not showing any weakening, ridership may drop in the short term which may affect their revenue.
So back to the golden question, is SBS Transit a bargain? It might be, 3.6% dividend is not bad if I'm an income investor but right now market is still going through illogical selling so low can get lower. For those with limited funds like myself, we have to be really thoughtful of what we buy now. 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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