5 Things To Know About SBS Transit Ltd (SGX: S61) Before You Invest
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Let’s talk about the latest comeback kid on the SGX today: SBS Transit Ltd (SGX: S61).
As I write, SBS Transit Ltd’s stock is trading at S$4 per share, which is a jump of 33% from S$3 as at end-January 2019. And an eye-popping 233% growth from S$1.20-ish levels as of mid-April 2014. This is impressive, considering that it was battered down from its peak of S$3.80 a share in May 2007.
Yup, the frenzy for SBS these recent months is evident from the sharp spike shown in the stock price chart below:
Are you excited to grab a couple of SBS’s shares in the stock market today?
If you are, please hold your horses and take a couple of minutes to read this article carefully before you decide to do anything.
Because in this article, I’ll expound the possible cause for its tumble in stock price in the past and its impressive recovery in the present. Finally, I’ll end my discussion by calculating its valuation figures based on SBS’s current stock price of S$4 per share (Editor’s note: this price is accurate only as of the time of writing).
So, without further ado, let us begin:
1) Why Did Stock Price Drop Between 2007 And 2014?
After some digging, I discovered that the following events could have potentially led to a tumble in SBS’s stock price between 2007 and 2014.
- An increase of 43.1% in higher fuel & electricity costs in 2008
- Lower sales due to temporary fare reduction in 2009
- Higher costs of fuel & electricity in 2011 – 2013
- Substantially higher staff costs in 2012 – 2013
- Start-up costs for Downtown MRT Line in 2012 – 2013
These significant rises in expenses outweighed SBS’s continuous rise in revenue during the 7-year period.
Thus, SBS recorded an ongoing fall in operating profits, especially from S$64.7 million in 2010 to only a total of S$15.5 million in 2013.
Consequently, it led to a drop in earnings per share (EPS) and dividends per share (DPS), causing its tumble in stock prices during the period.
2) The Introduction Of The Bus Contracting Model (BCM)
In 2016, SBS Transit entered into public bus services contracts with the Land Transport Authority (LTA) under the BCM. This was after its previous Bus Service Operating License expired on 31 August 2016.
Since then, SBS Transit has secured and is now operating 9 bus packages under BCM that covers: 222 bus services, 7 bus depots, 1 bus park, 17 bus interchanges, and 14 bus terminals. In total, SBS utilises 3,500 buses to operate the 9 bus packages presently.
Under BCM, SBS derives its revenue from:
- Fees from leasing buses to LTA
- Service fees indexed to changes of wages, inflation, and fuel costs
- Advertising and rental income of buses and related assets
Presently, SBS’s existing bus packages (subject to renewal) will expire on:
|Bus Packages||Year of Expiry|
|Sengkang - Hougang||2021|
|Serangoon - Eunos||2025|
|Bishan - Toa Payoh||2026|
And surprise, surprise!
SBS Transit Ltd also handles many of the new MRT lines. Side note: my family is a regular customer of the blue, DownTown Line as we live in the west.
Currently, SBS holds two key licenses to operate the following rail services:
|Rail Services||Date of Expiry|
|MRT North-East Line||31 March 2033|
|Punggol LRT System||31 March 2033|
|Sengkang LRT System||31 March 2033|
|MRT Downtown Line||19 December 2032|
3) Why Did SBS’s Stock Price Recover?
After it hit rock bottom of S$1.20 in mid-April 2014, SBS Transit stock has since rebounded and is somewhat the ‘comeback kid’ of SGX.
So, how did SBS do it?
I believe its comeback was propelled by a few key factors:
- Higher rail revenues from the Downtown MRT Line
- A continuous rise in bus ridership
- Lower fuel & electricity costs in 2016 due to a sharp fall in oil price
SBS’s growth in revenue, in recent times, has finally outweighed its increase in costs of operations. Naturally, SBS has recorded a significant improvement in its operating profits after 2014.
From the charts below, you can see that its profits went from S$15.5 million in 2013 to S$97.3 million in 2018. That’s an incredible 527% jump!
And if I place SBS’s stock price chart against its chart on operating profits… We can very clearly see how the SBS Transit stock has fared in comparison to its profits.
This is exactly like what Warren Buffett says, “If a business does well, the stock eventually follows.”
4) SBS Transit Stock Valuation
I’ll be evaluating SBS Transit Ltd through a few figures:
In 2018, SBS has generated S$97.3 million in shareholders’ earnings or S$ 0.257 in earnings per share (EPS). Hence, SBS at S$4.00 per share is trading at P/E Ratio of 15.56.
In 2018, SBS has net assets of S$1.69 per share. As such, its P/B Ratio is 2.37, which is the highest in 10 years.
In 2018, SBS Transit paid out S$0.129 in dividends per share (DPS). Hence, its dividend yield is 3.23% per annum.
|Stock Price||P/E Ratio||P/B Ratio||Dividend Yield|
As the SBS Transit stock price changes are in line with its operating profits, using the P/E ratio as a method of valuation will be a good gauge.
Looking at its P/E ratio for the past 10 years, it’s evident that SBS Transit Ltd was trading at an all-time low at the end of December 2018.
What this means is that even though SBS Transit Ltd’s profits have been rising, its share price has not moved in tandem. This resulted in a buyers’ frenzy which pushed up the share price by more than 40% within a short span of 3 months.
5) Our Verdict on SBS Transit Limited
With all that’s said, the next question that people will naturally ask is this: “Is SBS Transit a must buy at S$4?”
The long answer is… We would still have to look into its business model, risks involved, management team, and etc.
For some perspective, the STI Index is trading at a P/E of 13.6x currently and it usually dishes out a 3% dividend yield.
In SBS Transit’s case, it is trading at a reasonable valuation with a P/E of 15.5x and 3.2% yield. Which is not too far off from the STI Index’s numbers.
And based on the reports that I have read so far, there are no significant growth prospects or catalysts other than the following:
- Higher bus service revenue from the Seletar and Bukit Merah Bus Packages, which commenced operations from March 2018 and November 2018 respectively
- A 4.3% fare adjustment which was effective since 29 December 2018
- A double-digit increase in dividend payout rates as SBS Transit transforms into an asset-light servicing model to free up cash
In our opinion, SBS Transit still has plenty of room to grow.
However, investors should take note that the fate and direction of the company are closely intertwined with government policies.
Seedly Contributor: SmallCapAsia
SmallCapAsia is a website focused primarily on undervalued gems that can generate Big, Fat Returns for investors. Their Slogan is simple: Start Small, Win Big!
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