CGS-CIMB Research is keeping its “add” call on SBS Transit but with a slightly lowered target price of $3.40 from $3.50 previously. The research house is optimistic on SBS’ recovery prospects as Singapore moves towards an endemic.
In its latest FY2021 ended December 2021 results, SBS reported earnings of $51.6 million, some 34.6% lower y-o-y, despite revenue increasing 6.5% to $1.31 billion.
Full year operating loss, excluding government relief, has been reduced from $29.8 million for FY2020 to just $2.77 million for FY2021.
SBS proposed a final dividend of 2.45 cents, which brough full year payout to 8.2 cents.
See: SBS Transit reduces operating loss, proposes final dividend of 2.45 cents
Reversing a one-time write-off of $15.8 million due to an early replacement of buses as part of revised framework agreement with Land Transport Authority (LTA), SBS’ FY2021 core net profit came in at $67.4 million, some 15% lower y-o-y. This came in above CGS-CIMB’s expectations at 114% and consensus’ forecast of 119%.
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In a Feb 25 report, analyst Ong Khang Chuen says, “The key surprise was higher government reliefs – SBS received another $7.8 million in 4QFY2021 (without which results would be in line with forecasts). Core 4QFY2021 Ebit (excluding government relief) rose to $9.3 million on higher ridership nearer end-2021.”
To that end, Ong expects rail ridership to recover to 85% of pre-Covid levels by end-FY2022, increasing from 68% in January 2022, as Singapore’s economy reopens further.
Despite the recent rise in Covid-19 cases, the Singapore government remains committed to “living with Covid-19”. Finance Minister Lawrence Wong said the government is aiming to take further significant steps to ease Covid-19 restrictions after passing the peak of the current wave, which can happen in the coming weeks.
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“That said, with hybrid work arrangements increasingly prevalent, we think it is unlikely ridership will return to pre-Covid levels in the near future. We forecast ridership to return to 90%/92% of pre-Covid levels by FY2023/2024,” says Ong.
Meanwhile, the analyst believes that the new framework agreement with LTA will be a net positive for the group in FY2022, helping to partially offset the impact of the absence of Jobs Support Scheme support. Under the new agreement effective Jan 2022, SBS’ Downtown Line (DTL) has undergone a license charge structure change, which Ong estimates will help lower SBS’ rail segment losses by at least $30 million per annum from FY2022 onwards.
On the other hand, the lower service fee for renewed bus contracts will only be effective from September 2022 onwards.
Meanwhile, DBS Group Research is keeping its "hold" call on SBS Transit, also with a slightly lower target price of $3.28 from $3.39.
In his March 3 report, analyst Woon Bing Yong sees his current target price as valuing the transport operator fairly at a 10-year mean P/B of 1.74x.
"We used a 10-year period to adjust for a short-lived spike in SBS’s share price in 2019. In addition, SBS trades at an FY2022 P/E of 21x, which represents SBS's 10-year mean forward P/E," he writes.
Given the uncertainty of the Covid-19 situation as well as possible structural trends depressing rail ridership, Woon says he is more cautious on the counter compared to his peers.
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To him, the extent in SBS's rail ridership remains uncertain.
In FY2021, SBS saw total average daily rail ridership of 744,000 across its train lines, down 39% from the 1.22 million average daily rail ridership in FY2019.
"Even as Singapore reopens, ridership could take time to recover to pre-pandemic levels, as light restrictions remain in place and structural changes such as flexible working are implemented. As such, we have projected the average daily rail ridership to increase to 896,000 in FY2022, which remains depressed when compared to FY2019," writes Woon.
Unlike CGS-CIMB's Ong, DBS's Woon sees SBS's new framework agreement with LTA as stable but may slow the operator's future growth.
"The lower service fee from the new bus packages may be offset by a revamp in the licence charge previously paid for the Downtown Line. That said, future rail EBIT above a 5% EBIT margin will now be mostly shared with the LTA through the EBIT cap and collar mechanism. Still, we do not expect the group to exceed this margin in the near future," he says.
As at 11.30am, shares in SBS are trading at $2.91 or 1.42x FY2022 earnings with a dividend yield of 3.92%.
