SBS Transit sells NEL and Seng Kang LRT to LTA. Moves to Rail Financing Framework. Deal does not look Good

So shortly after I shared some of my thoughts on SBS Transit, SBS announces tonight that they will be selling the North East Line and Seng Kang, Punggol LRT to LTA.

SBS will also be transiting to the New Rail Financing Framework. NRFF.

The sale consideration is $28 mil, which is a small amount in the grand scheme of things. With the sale, SBS can be truly asset light.

The NEL concession was a 30 year operating contract with a possible 30 year extension. This will be changed to a 15 year concession starting in April 2018 with the option to extend for 5 more years. This is similar to the SMRT NRFF.

SBS have to pay a licensing charge to LTA for the use of the assets.

SBS’s future income will be based on its operating income or EBIT margin. If the margin is lower than 3.5%, LTA will replenish 50% of the shortfall to get it closer to 3.5%. This means that the bottom is not 3.5% but a number closer to 3.5%. Suppose the margin is 1%. LTA should top up 1.25% worth and SBS will earn a total of 2.25% in EBIT margin.

If the margin exceeds 5%, SBS get to earn only 5-15% of the EBIT above the 5% margin.

Thus, SBS loses uncertainty in capital expenditure and costs, but it gains some form of predictability.

The difficulty for us is that it is difficult to separate how much of SBS’s assets is NEL. I have a feeling SBS will be worse off if we compare  to last year.

I dug up some of my friend and my past work on SBS rail segments.

In recent reports, SBS classified the whole transport business as a segment so its even harder to see the breakdown.

In the table above we see the segmental for the rail business from 2003 to 2015.

NEL started operation from 2003 and it went through a period where it was loss making. If you observe the EBIT, it gradually became positive.

Around 2011, SBS started funding and preparing for the first phase of DTL. So you can see that while revenue is going up, the EBIT went down.

We cannot attribute how much is due to NEL or DTL Phase 1 and 2, but we can have a sensing what is the EBIT margin in those 5 years where the data is not tainted.

The EBIT margin is 4.7% to 14.61%. Now that is high margin.

So if SBS was to be under the current scheme in those 5 years the operating profit or EBIT will be much lower.

For example, if we take 2011, SBS earned $19.64 mil.

Assuming a 5% EBIT margin and a 15% threshold of the amount in excess of 5%,

5% EBIT profit = $134 mil x 0.05 = $6.7 mil

15% of excess = ($19.6 – $6.7 ) x 0.15 = $1.93 mil

Total earned in 2011 if under this new concession = $6.7 mil + $1.93 mil = $8.63 mil

This looks a drastic reduction. NEL ridership might have grown since then, but would also moderated by spreading out to the other MRT lines since Circle line came into operation. This looks like a 55% reduction in EBIT.

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