SBS Transit currently has a market capitalization of $802 mil with 311 mil in outstanding shares. This is one company that I have invested in at $1.30-$2.00 in the past.
The story is panning out, not exactly as what I anticipated, but its close enough. There were much focus on the selling of the bus fleet back to the government but in my opinion, the attractiveness of SBS is to return to the situation in 2000-2001 time.
Back then, SBS have manageable capital expenditure and was able to pay a very controlled 5% dividend yield. When the bus capital expenditure increases to a new normal, they have a problem there.
A move to the government contracting model will be able to move all these off their financials. They still have the costs which are indexed to inflation, but they are not subjected to fuel cost fluctuations and capital expenditure needs. This means the government can charge you and me $0 for our bus fare and SBS will still be profitable.
SBS Transit’s income statement looks much better nowadays. The earnings yield (47 mil / 802 mil) is 5.8%. In my opinion that earnings yield is not bad.
We got to give ourselves a pat on the back as we try to deconstruct how much SBS would earn based on operating margins of 5%, 6%, 7%, 8%, 10% and look at what overseas public bus operators like Go Ahead and Tower Transit earned and came to a close enough figures.
These operators won’t come in to compete if they don’t think there are no money to be made.
However, my sensing is that public transportation is in the public eye and these financials are out there in the public eye. This means that the government won’t want to give a contract such that it is so lucrative that it becomes a public discussion.
5.8% is pretty good if this is a business that won’t be disrupted, have monopoly power and can go on for along time.
Under the GCM model, each bus parcel is a concession for different duration with the earliest probably expiring in 1 years plus. Then it is up for tender.
What this means is that there runs a risk of SBS winning less or more bus parcels.
In contrast, the concession for the rail operation, NEL and Downtown Line are more than 10 years. There are justifications why ComfortDelgro share price took a hit when it was announced they did not win the TEL operation.
In my opinion, the concessions are short and these stocks are trading at 5.8% earnings yield.
As a comparison, some of the toll road companies I have invested in the past (China Merchant Pacific) and now (Yuexiu Transport) was trading at 8-10% earnings yield and we know their average concession is 15 years or so. Roads are more volatile as they can get diverted and there goes your earnings (or they could divert into your road and you will have a significant boost.)
Back to the result.
You can read why the results were better, from SBS perspective:
Now to the balance sheet.
From the income statement, SBS have lower financing costs. From the balance sheet its been observed that its dropped from $216 mil to $181 mil or about $35 mil.
They took on these debts for capital expenditure and one of my guess is that if they manage to sell the bus fleet back to government at book value (this guess was wrong, government leased from them for a fee as you will see in the cash flow statement) they will repay all the debt and they will be net cash.
This seem to be happening in a different way.
Vehicles and premises are going down. This would be the bus fleet and likely the operation premises of the North East Line. The assets of NEL is parked in SBS, but technically they do not own it (as per the NEL contract)
In 2017, there was no more grant received (78 mil) coming in. This could be the 64 mil change in working capital. This grant is likely the payments by government to lease the bus assets under the GCM model.
If we compute the free cash flow, which includes the interest paid and grants received, it improved from 106 mil to 118 mil. The enterprise value of SBS currently stands at $978 mil.
This gives a very high cash flow yield based on EV of 12%.
The good news is that SBS is bumping up the dividends from a final $0.027 to $0.0395. The annualized dividend in this case to $0.076.
The dividend yield based on the share price of $2.62 is 2.9%.
To pay out this dividend, SBS would need $23.6 mil. This is a 50% net profit payout ratio which is conservative.
In valuing companies, it is difficult to say a company is worth $X. We try our best to approximate it.
SBS looks to be a concession business that is restricted by the government policies where they operate in. There are downside and upside risks of them getting more concession contracts (whether its bus or rail) or less.
Thus, it is not a business that will produce cash flow to infinity. From the free cash flow perspective, it looks very attractive but that is only because there is an expiry to the concession.
A better way to look at this is to estimate the cash flow for these 10-20 years, and then do an XIRR to see if its attractive.
A rough gauge will be based on the earnings yield of 5.8%. This ranks it higher than SIA Engineering and SATS in attractiveness. However, my reservations at this point is that SBS seems to be more dependent on each individual parcel wins, or MRT contracts then the more predictable nature of SATS business.
I think SBS is fairly priced at this point.
The upside surprise would be that the nature of DTL’s contract allows SBS to earn in a similar manner to NEL. I have this believe that DTL’s rail contract, which takes its cue from the one issued to SMRT, have limited up side and downside potential.
What lessons do you learn from deconstructing your child hood relationship with money, or in your experience teaching your kids about money? Do share with us.
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