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'Buy' SBS Transit for road to recovery, favoured over ComfortDelGro: CGS-CIMB

Jovi Ho
Jovi Ho • 3 min read
'Buy' SBS Transit for road to recovery, favoured over ComfortDelGro: CGS-CIMB
CGS-CIMB continues to prefer SBS Transit over parent company ComfortDelGro.
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SBS Transit is on the road to recovery with further easing of social distancing measures expected soon, says CGS-CIMB analysts Ong Khang Chuen and Darren Ong. In a Nov 12 note, the analysts maintain their ‘add’ call on the transport operator, with a raised target price of $3.60.

“We expect rail ridership to recover to 75% of pre-Covid levels by end-FY2020F, helped by further easing of social distancing measures in Singapore, including the relaxation of work from home arrangements and a potential transition to phase 3 of its economy reopening,” say the analysts.

Rail ridership has seen steady recovery since the lifting of circuit breaker measures in June, they add. According to SBS Transit, rail ridership for the Downtown Line and North-East Line were at 53% and 60% of pre-Covid-19 levels respectively as of end-September.

See: SBS Transit reports 3Q EBITDA of $46.1 mil, says there will be no fare adjustments in fare review exercise

The note comes a week after SBS Transit reported its 3QFY2020 results, with earnings before interest, taxes, depreciation and amortisation (EBITDA) of $46.1 million, down 10.3% from the $51.4 million reported a year ago.

Year-to-date (y-t-d) ended September, SBS Transit reported a 18.4% y-o-y decline in EBITDA to $159.8 million.

“SBS Transit Ltd reported 3QFY2020 net profit of $19.4 million (-3.5% y-o-y), above our expectations, with 9M20 net profit forming 94.0% of our previous full-year forecast. The key surprise was better-than-expected cost control,” note the CGS-CIMB analysts.

Revenue saw sequential recovery to $302 million (+14.3% q-o-q, -17% y-o-y), helped by the recovery in public transport ridership as Singapore eased its social distancing measures post-circuit breaker, they say.

Meanwhile, operating costs (excluding government reliefs) stayed rather constant q-o-q, allowing SBS to achieve EBITDA margin expansion of 1.1% pts to 15.3% during the quarter.

Operating costs fell 16.6% y-o-y to $282.5 million mainly due to lower staff costs that were mitigated by government reliefs, as well as lower costs from fuel, electricity, repairs and maintenance.

CGS-CIMB continues to prefer SBS Transit over fellow transport operator ComfortDelGro. “As the bulk receiver of government reliefs, SBS could see better earnings protection from Covid-19 impact vs ComfortDelGro in 2020F, in our view.”

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ComfortDelGro owns nearly 75% of SBS Transit — the largest public bus operator here — which is listed separately on the Singapore Exchange.

The Singapore government’s more prudent approach to tackling Covid-19 also makes us more confident that a major resurgence in new cases would not happen in Singapore compared to other geographies that ComfortDelGro also operates in, they say. These include bus and coach operations in China, UK, Ireland and Australia.

With strong free cash flow (FCF) generation post the implementation of Singapore’s Bus Contracting Model (BCM) in 2016, CGS-CIMB also expects SBS to turn into a net cash position by end-FY2020F. “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 FY2019.”

“We expect a stronger 4QFY2020F underpinned by further public transport ridership recovery, and forecast SBUS to record a net profit of $23.1 million (+19.4% q-o-q, +40.5% y-o-y) for the quarter,” they say.

As at 10.10am, shares in SBS Transit are trading at 7 cents higher, or 2.33% up, at $3.07.

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