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CGS-CIMB starts SBS Transit at 'add' on ridership recovery

Felicia Tan
Felicia Tan • 3 min read
CGS-CIMB starts SBS Transit at 'add' on ridership recovery
As at 2.48pm, shares in SBS Transit were trading 6 cents higher, or 2.2% up, at $2.85.
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CGS-CIMB Research has initiated coverage on SBS Transit with an “add” rating, making it the first brokerage in Singapore to do so. The brokerage has also given the stock a target price of $3.40, representing a 21.9% upside to the stock’s last closed price of $2.79 last Friday (September 18).

CGS-CIMB analysts Ong Khang Chuen and Darren Ong are positive on the counter as they expect passenger traffic on public transport to return to around 90% of pre-Covid levels by FY21F.

The analysts are also upbeat on the stock due to its position as a market leader in the public bus industry, which generates defensive earnings and stable cash flow under the Bus Contracting Model (BCM).

Since the lifting of the circuit breaker measures in June, ridership on SBS Transit’s buses and trains have “steadily improved”. SBS’s rail ridership rose to around 55% of pre-Covid levels in August, five percentage points up from the 50% logged in July.

As Singaporeans are also slowly resuming social activities and local community cases of Covid-19 at low levels, both analysts see room for further relaxation of safe distancing measures that could lead to higher ridership numbers.

While ComfortDelGro owns a 74.4% stake in SBS Transit, the analysts say they “prefer” the latter due to better earnings protection from the Covid-19-induced social distancing measures. SBS Transit also offers direct exposure to potential catalysts such as tender wins for Bulim and Sembawang-Yishun bus packages, and reforms in the rail financing policy.

“With strong free cash flow (FCF) generation post the implementation of the BCM in 2016, SBS Transit has turned into a net cash position by end 1H20,” they write in a note dated September 18.

“We see upside to its dividend payout ratio (FY19: 50%) post earnings normalisation, as its parent company ComfortDelgro had a dividend payout ratio of 80% in FY19,” they add.

Believing that the worst is over for SBS Transit, the analysts estimate a net profit recovery (+35% y-o-y) in FY21F.

“SBS Transit currently trades at 11.7x CY21F price-to-earnings ratio (P/E), or -0.5 standard deviation (s.d.) below its 5-year historical average, which we think hasn’t factored in the recovery scenario and potential catalysts,” they say.

For FY20F ending December, the analysts have estimated a price-to-book value (P/BV) of 1.58x and dividend yield of 3.17%.

However, they add that a key downside risk to the stock is a slow pace of rail ridership recovery.

As at 2.48pm, shares in SBS Transit were trading 6 cents higher, or 2.2% up, at $2.85.

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