Valuations for SBS Transit are fair, for now, says DBS Group Research analyst Woon Bing Yong, though the “faster-than-expected” ridership recovery is a boon.
In a June 9 note, Woon is maintaining “hold” on SBS Transit with a target price of $3.28. The target price represents a 14% upside.
“Singapore’s average daily rail ridership recovered to approximately 891,000 in April 2022, nearing the Covid-19 high of some 897,000 in April 2021 but remaining about 27% below pre-Covid-19 levels,” writes Woon.
SBS Transit recorded 1QFY2022 profit after tax of $15.5 million, despite lower government relief. The figure was also approaching our previous full-year FY2022F projection of some 896,000 in average daily rail ridership.
The transport operator’s strong net cash position is a prelude to better dividends ahead, says Woon. As of end-1QFY2022, SBS Transit was in a net cash position of $236.7 million, a q-o-q increase of $32.7 million.
“We reiterate our belief that some cash could be kept as a buffer against rising costs, with the remainder potentially returned to shareholders through an elevated dividend policy in the medium term,” says Woon.
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Woon says DBS analysts were previously “overly conservative” on SBS Transit’s EBIT margin, expecting the company to only record FY2022F EBIT margin of 3.6%. “As such, we have increased our FY2022F projections for average daily rail ridership to approximately 939,000 and also raised the EBIT margin to 5.7%.”
As part of the LTA’s New Rail Financing Framework Version 2 (NRFF 2), five of SBS Transit’s bus packages (Bedok, Tampines, SerangoonEunos, Clementi, and Bishan-Toa Payoh) were extended, albeit at a lower rate.
“Looking forward, we see potential uncertainty arising from lower fees for the five bus packages which were extended by an average of three years by LTA. Indeed, the extension terms require the service fees of the extended bus packages to be revised to a rate benchmarked to recent bus tenders,” says Woon.
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Recent bus tenders were rumoured to have a rate that was 15% lower than before and are estimated to potentially reduce operating profit by some $34 million based on FY2020 proforma figures, adds Woon.
DBS Group Research is suspending coverage of SBS Transit due to reallocation of resources.
As at 3.17pm, shares in SBS Transit are trading 1 cent lower, or 0.35% down, at $2.87.
