CGS-CIMB’s Ong Kang Chuen and Darren Ong have maintained their “add” call on SBS Transit, but with a reduced target price of $3.50, down from their previous figure of $3.60. 

The analysts note that the company posted a “strong set” of 1QFY2021 results, with net profit coming in at $23.3 million, which is 14% lower q-o-q, but a whopping 109% higher y-o-y. This is “in line” with their previous FY2021 forecast.

The duo also highlights that SBS’s topline was weaker than expected, coming in at 6.5% lower y-o-y, as it was “dragged by lower rail ridership and advertising revenue... but this was offset by stronger-than-expected cost control.”

Furthermore, government grants continued to be the main help for the company, with SBS receiving $18.6 million worth of reliefs during the quarter.

Despite this strong showing, the analysts say it’s a long and winding road ahead for SBS. 

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They point out while rail ridership continued to show an improving trend YTD, “the pace of recovery, thus far, has been below expectations.”

In view of the recent tightening of Covid-19-related restrictions in Singapore, they now only expect rail ridership to recover to 85% of pre-Covid-19 levels by end-FY2021. 

However, they view the Downtown Line (DTL) financing framework review as a key potential catalyst this year for SBS.

They see a 26%-30% upside to SBS’s FY2021-2023 net profit forecasts should the fixed license fee be waived. 

This is as DTL operations have consistently been loss-making, and the losses further widened in 2020 due to Covid-19. 

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As Covid-19 is likely to bring structural changes to the flexibility of work arrangements, the analysts believe there is an “urgent need” for the government to review the rail financing framework. 

Under the New Rail Financing Framework, infrastructure and rail asset management will now come under the purview of the LTA. In turn, the train operators run the day-to-day operations of trains and retain a share of profits –  but it pays an annual licence charge to the LTA, which varies according to the rail operators’ profitability.

“Without government intervention, DTL would remain loss-making for longer, and we believe it would be difficult for operators to maintain high reliability of rail line operations while sustaining continuous losses.” they conclude.

As at 3.01pm, shares of SBS Transit traded at 2.99, six cents higher or up 2.05%, with a price to book ratio of 1.53 and dividend yield of 4%.