SBS Transit

[CY09]

To the public in Singapore, profits from PTOs is "operations + rental + advertising profits"; the latter 2 makes up a lion's share of profits for the incumbents.

To many VB here, it seems the viewpoint of profitability is focused solely on the operation segment.

Both sides have their own viewpoint that are right; however the profits of operations+ retail component should not be viewed in isolation. Hence in the new model, LTA will have to see how much total profits should be apportioned to their operators. Using public fund to shoulder the less profitable bus operations+ giving an operating margin to operators while allowing the latter to pocket the non fare revenue, is not a proposition the public will like. Even I will prefer that all revenues goes to govt and then a margin be returned to operators should they provide good transportation service

[yawnyawn]

Allow me to put forward my views but vested shareholders may be unhappy but please feel free to point out my shortsightedness.

I am going to make some assumptions to keep things simple.

In the latest financial statement, Sbs transit has a NAV of 1.07. Assuming the govt buys back all buses & vehicles at its cost less depreciation, Sbs pays down all its bank loan, then assuming the directors are super generous, they pay out 70 cents as special dividend. What a windfall for shareholders but who knows it is possible because all analysts are now supporting this asset light model so the company doesnt have to hold much capital anymore.

Now with most of the cash paid out, we have to value Sbs according to its earnings now. For the past 9 mths 2014 & 2015, it earned 4.54 cents and 5.28 cents respectively. I will annualise the 2015 earnings so that it works out to be around 7 cents. This works out to be profits of 21-22m per year.

On the basis of the asset light model, the government will no doubt allow the operators to earn a profit but i dont think it will be so substantial that it is going to exceed 7 cents per year. Why do i say that? The govt will argue that since sbs transit does not have to lay out any capital now (or rather far less capital now), the risks it is taking is obviously lesser and deserves less profits. And do not forget that many of these but routes will be eventually put up for tenders and profits will be pushed downwards but we are not going to dwell into that at the moment.

Let's assume that the govt is kind enough to grant sbs transit 21-22m profits per year, that works out to be 7 cents per year. Since it has gone asset light and does not need to retain capital so sbs transit will pay out 7 cents per year as dividend. Shareholders will once again be happy and smile in their dreams. (actually for a long time, sbs has not paid out 7 cents per year but we are going to be optimistic to keep things simple). Since this is a defensive industry like the telcos & st engineering, i will assuming that mr market will value it as a 6% yield stock. So the stock should be priced around 116 cents.

70 cents special dividend + 116 cents valuation should work out to be around 186 cents today. but last friday the stock was priced around 202 cents.

In my humble opinion, there is no margin of safety and the stock has been overhyped. I understand that this is a public forum so if the speculators who are going to pump and dump read this post, they will most likely pump the stock higher to make me feel stupid but time will tell if i am partially wrong or very wrong.

Thank you for taking the precious time to read this long post. i always think that someone has to play the bad guy so that the man on the street will not naively believe what he reads in the press or newspapers and get too optimistic. Haha

My opinion is that, for the next 5 years after the contract renewal, SBST will make higher than 21-22M NPAT even without the revenue from advertising and rental income.

I took the Business Segment Infomation under the 2013AR(note that SBST does not break down their bus, rail, advertisment and rental for their revenue and expenses from 2014AR onwards) which shows that Bus and Rail generated close to 800M revenue. SBST should make roughly 40M assuming a net profit margin of 5%(6% operating margin).

However, since only 80% of the remaining bus routes will continue to be operated by the incumbent(SBST and SMRT), i estimate that SBST can make around 32M NPAT. 

Now going back to your assumptions 
1) company pays out 100% of earnings 
2) Mr Market values the stock at 6% yield 
3) Special dividend of 70c declared upon selling off their operating assets

the new valuation comes up to $2.40 

Note that i did not include what will happen after 2021. Most likely, SBST will lose more market share if they do not buck up as LTA's intention is to have 5 bus operators plying on Singapore roads going forward.

(not vested)

[CityFarmer]

To the public in Singapore, profits from PTOs is "operations + rental + advertising profits"; the latter 2 makes up a lion's share of profits for the incumbents.

To many VB here, it seems the viewpoint of profitability is focused solely on the operation segment.

Both sides have their own viewpoint that are right; however the profits of operations+ retail component should not be viewed in isolation. Hence in the new model, LTA will have to see how much total profits should be apportioned to their operators. Using public fund to shoulder the less profitable bus operations+ giving an operating margin to operators while allowing the latter to pocket the non fare revenue, is not a proposition the public will like.  Even I will prefer that all revenues goes to govt and then a margin be returned to operators should they provide good transportation service

The new bus contracting model, has indirectly taken a holistic approach to PTO profitability, right? 

Each PTO will bid on basic of "desirable" cost-plus profit, after taken all consideration, including the supplementary income(s). With market competition, the service fee will be reduced, thus reduced the burden of public fund, isn't it?

(not vested)

[CityFarmer]

In a nut-shell, the incumbent PTOs are moving from a highly-regulated, duopoly-market, to a lower-entry-barrier service-contract-based open market. Granted, the plus is, a new profitable cost-plus, instead of the old unsustainable money-losing model, but there is the negative of much higher market competition. I am skeptical on the both SBST and SMRT future outlooks, except the likelihood of one-time compensation on their existing operating assets. The contracting model has started for bus, and similar model for rail should already in LTA/MOT internal road-map. Bear-in-mind, the rail biz of both SBST and SMRT are still profitable.

(not vested in both, but providing a different view)

[Nick]

To the public in Singapore, profits from PTOs is "operations + rental + advertising profits"; the latter 2 makes up a lion's share of profits for the incumbents.

To many VB here, it seems the viewpoint of profitability is focused solely on the operation segment.

Both sides have their own viewpoint that are right; however the profits of operations+ retail component should not be viewed in isolation. Hence in the new model, LTA will have to see how much total profits should be apportioned to their operators. Using public fund to shoulder the less profitable bus operations+ giving an operating margin to operators while allowing the latter to pocket the non fare revenue, is not a proposition the public will like.  Even I will prefer that all revenues goes to govt and then a margin be returned to operators should they provide good transportation service

The new bus contracting model, has indirectly taken a holistic approach to PTO profitability, right? 

Each PTO will bid on basic of "desirable" cost-plus profit, after taken all consideration, including the supplementary income(s). With market competition, the service fee will be reduced, thus reduced the burden of public fund, isn't it?

(not vested)

The service fee has already been locked in for 2 out of 3 contracts. These contracts represent approximately 20% market share of the local bus industry.

Bulim: $556 million (or $111 million p.a) for 5 + 2 years.

Loyang: $497 million (or $100 million p.a) for 5 + 2 years.

Contract 3: ???

The service fee is not constant. It will be adjusted for changes in operating cost i.e. fuel cost and wage changes hence ensuring a sustainable operating margin to the PTOs throughout the contract. This also exclude the incentive fees (of up to 10%) if service quality targets are met. The remaining 80% of market share will be given to the incumbents till 2021. Competition will not matter for another 5 years.

Warning: Very Crude and Speculative Model

The goal is not to determine the profit of restructured SBS Transit bus segment but to show how based on few assumptions, this bus contracting model can improve the company's bottomline.

SBS Transit generated $25.8 million EBIT from the bus non-fare operation and -$13.5 million EBIT from the bus fare operations in FY 2014 with approximately 75% market share. The overall EBIT margin is merely 1.6%. The total operating cost of the entire bus segment works out to approximately $740 million p.a.

Go Ahead reports over 9% operating margin for its London Bus segment which runs in a similar model. Based on their annual report, 95% of the revenue is derived from the fixed fee income from TfL (Transport For London) while the remaining 5% is from performance fee and advertisement income. The press has long reported that we are modelling our bus contracting model after the ones used in London and in Perth. The margins in SG needs to sufficiently lucrative to entice foreign operators to set up business here. If the EBIT margins remains at < 2%, I highly doubt anyone will venture into tiny Singapore just to earn $2 million per contract. Assuming the segment operating margins are 7%, it implies that the two contract operating margin should be around $15 million. Once the third contract is up, we can verify the EBIT for 20% market share. Again, this assumes the contract value prices in the non-fare revenue (which isn't true). But since the non-fare revenue isn't substantial compared to bus operating revenue, I don't think it will make much difference to this very crude estimate.

Hence, if SBS gets 60% market share from LTA and it can earn 7% margin (big assumptions), it implies that SBS would earn $45-60 million EBIT from the bus segment alone. This excludes the train operations which sees DTL2 commencing operation later this year. This is the second twin engine of growth for SBS Transit as it is currently loss making due to start-up cost. Currently the NEL and DTL lines are already operating under the asset-light regime so there is minimal capex cost unlike what SMRT is experiencing. While the rail business for SBS is still loss making, it could improve once the DTL is fully operational. 

This is a very crude modelling technique. We are completely ignoring the train segment here. There are a lot more parameters to alter in order to model SBS earnings. I came up with numerous possibilities. Even analysts have attempted to do so but they do it via ComfortDelgro perspective.

I suspect there will be a large improvement in SBS earnings. However, I don't think we will face a scenario of > 7% margin on service fee + non-fare income. Likely the blended margins will be around 7-10%. Again, this is simply my guess. One should explore various margins and see what data pops up.

Competition will intensify post-2021 with the incumbents 9 contracts up for tender. It is imperative that they maintain the service quality and exceed their targets to stand a good chance of retaining these contracts. Since the contracts are not based on price alone, the quality of service matters highly. Hence I don't foresee a substantial margin erosion in the decade to come. Or else, it would make far more sense to award the Bulim contract to SMRT at $93 million instead of Tower Transit at $111 million.

Naturally, this remains a fairly speculative investment. Unlike many investment with readily available financial data, this relies heavily on a prospective investor using models and parameters to determine a possible range of future earnings. Moreover, unlike Comfortdelgro, there is no diversification to protect an investor if things fail to turn out as planned.

I stress once again - this is a very crude and highly speculative estimate with a number of assumptions. It could (and very likely) be wrong. I await further details in the coming months from regulatory bodies and the Management. Till then, its just guesswork. Finding the the exact number is not quite the goal. The key is to derive a set of possible future earnings based on various assumptions and see if it fits with the underlying valuation.

Please point out errors in my thinking/logic or data.

**I edited the original post to reduce the complexities in the model I had created. Keep things light and simple**

(Vested)

[opmi]

Comfort Delgro already competing in London. So
should be ok with competition here.

[CityFarmer]

Thanks Nick for the detail earning model. Let me approach it from another perspective.

After the BSOL expire on mid 2016, Singapore bus operation will move gradually to cost-plus model. One important note, service fees will be negotiated. The base should be mainly from the three service contract awarded by then, rather than existing incumbents cost. Based on the last two bids, SBST bid values were higher than the winners in both contracts.

"Competition will not matter for another 5 years"? First of all, the service fee awarded to the incumbents (the 80%), will be affected by the first three contracts, after competitions. Next, the competition comes from resources e.g. bus captains, and maintenance staffs. Last and not least, the competition in service quality. The first one is likely to reduce the sales, and the latter two will likely to increase expenses.

In summary, I am not sure, the bus operation will turn into black (with sufficient margin) with the new model, even before 2021.

[cif5000]

Since the contracts are not based on price alone, the quality of service matters highly. Hence I don't foresee a substantial margin erosion in the decade to come. Or else, it would make far more sense to award the Bulim contract to SMRT at $93 million instead of Tower Transit at $111 million.[/align]

Based on the last two bids, SBST bid values were higher than the winners in both contracts.

Tower Transit $125.6 Million per year (not $111m)
SBS Transit $125.2 Million per year (not higher than Tower Transit)

https://publictransportsg.wordpress.com/...s-package/

[Nick]

Thanks CityFarmer for the exchange of views.

SBS Transit's bid for Bulim contract is actually lower than that of Tower Transit. SMRT priced itself significantly lower than the winning bid. Perhaps, it was trying to win market share at the expense of its margins. Price alone won't guarantee an operator winning (or keeping) the contracts in this model. The last thing the public needs is a loss making operator with cost overrun so I reckon the contract price needs to reflect sustainability as well. Do note that the service fee will be adjusted for changes in wage level, inflation, operating cost etc.

Go Ahead won the second tender and has been operating in London for a number of years. The London market is far more competitive than the Singapore market with numerous players competing for routes and no dominant player. Let's examine the impact of the gross contracting model on their margins in recent years:

London Bus Operating Margin for Go Ahead

2012: 9.2%
2013: 9.5%
2014: 9.3%
2015: 9.2%

Excluding the impact of acquisitions, it is largely a low growth industry with utility-like earning stream. There don't seem to be margin erosion. Growth comes mainly from performance fees upon meeting service standards. This isn't surprising. Competition exist to ensure that each operator will do their utmost to meet their targets or else they would lose their contract in the next tender.

Every market is different. I am not implying we are going to see 9% margins for bus segments. We will only find out about this when both incumbents release their 3Q 16 results. Meanwhile, we will see what happens as this progress. It is a new model locally and I do hope (as a consumer) it really would improve service standards significantly.

http://www.straitstimes.com/opinion/new-...er-service - I find this to be a good article summing up the rationale behind the gross contracting model and it is highly relevant to this discussion.

(Vested)

[CityFarmer]

Since the contracts are not based on price alone, the quality of service matters highly. Hence I don't foresee a substantial margin erosion in the decade to come. Or else, it would make far more sense to award the Bulim contract to SMRT at $93 million instead of Tower Transit at $111 million.[/align]

Based on the last two bids, SBST bid values were higher than the winners in both contracts.

Tower Transit $125.6 Million per year (not $111m)
SBS Transit $125.2 Million per year (not higher than Tower Transit)

https://publictransportsg.wordpress.com/...s-package/

Based on CNA, the total package value from Tower Transit is estimated as S$556 million, SBST asked for S$600 million.

Source: http://www.channelnewsasia.com/news/busi...43220.html

P/S: Go-Ahead total contract value is 498 mil, SBST bid was 546 mil in the 2nd contract bidding. I hope I didn't miss any important point(s) here.