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DBS starts SBS Transit at 'hold' on 'fair' valuation at current prices

Felicia Tan
Felicia Tan9/2/2021 01:39 PM GMT+08  • 5 min read
DBS starts SBS Transit at 'hold' on 'fair' valuation at current prices
The analysts have pegged a TP of $3.44, which implies a 13% upside to the counter’s market price of $3.03 at close on Sept 1.
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DBS Group Research has initiated “hold” on SBS Transit with a target price of $3.44.

The target price implies a 13% upside to the counter’s market price of $3.03 at close on Sept 1. It also represents SBS’s 10-year mean price-to-book (P/B) of 1.74 times.

To analysts Woon Bing Yong and Paul Yong, SBS is a “hold” at its current prices.

Its valuation also appears fair with an FY2022 price-to-earnings (P/E) of 19.0 times, which is approaching SBS’s 10-year mean forward P/E of 21.2 times.

The counter is also trading near the peer average P/B of 1.6 times.

“While recent developments in parliament hint at potential support for the Downtown Line, we are erring on the side of caution given the government’s outsized fiscal measures provided due to Covid-19,” write Woon and Yong in a Sept 2 report.

However, the analysts have included several scenarios that will pose upside risk to their base case assumptions.

The scenarios include a “significant revamp” of the Downtown Line financing framework that leads to profitability, a turnaround in rail ridership coupled with higher-than-expected fare revision, as well as the award of a new bus package tender

To the analysts, SBS is likely to adjust its fares upwards in the upcoming 2021 fare review exercise, as cost pressures mount.

See also: CGS-CIMB sees 'bumpy road to recovery' for SBS Transit

As such, they have projected fares to increase 7% y-o-y in FY2022 to make up for the unchanged fares in FY2020. The unchanged fares in FY2020 were done to support the group’s commuters during Covid-19.

The increased fares in FY2022 would translate to a 7.3% increase in projected FY2022 revenue of $1.379 billion.

The higher revenue will offset the tapering of government support measures, which are not expected to be extended till FY2022.

Under the jobs support scheme (JSS), SBS received some $109.8 million in wage subsidies for the FY2020, which helped cushion the impact of the group’s lower ridership.

The analysts say they expect SBS to receive a further $25 million in wage subsidies for the FY2021, which will help mitigate the impact of the Covid-19 pandemic.

To this end, SBS’s FY2021 net profit is expected to come in at around $44.7 million with the wage support.

In the likely absence of the JSS in FY2022, SBS will have to record higher ridership figures, or lower costs to make up for the shortfall.

The Sengkang-Hougang bus package is likely to be retained by SBS.

The package is due to expire in September 2021, and should have already been up for tender “under normal circumstances”.

“However, tenders are usually called at least six months before a bus package is due to expire. With less than three months to expiry, we believe that the lack of a tender will be in SBS’s favour, as it hints at a possible extension of the bus package without a tender,” write Woon and Yong.

Looking ahead, 2023 will be an important year for Singapore’s bus operators with seven bus packages set to expire within the year.

“While four bus packages from SBS will be at risk, the group may also stand to gain if it clinches the larger bus packages of Loyang and Choa Chu Kang – Bukit Panjang, both of which involve over 30 bus services,” surmise the analysts.

“However, until then, little developments are expected on the bus package front. FY2022 revenue for the bus business will likely be relatively stable, as SBS only collects fares on behalf of the Land Transport Authority (LTA). In other words, the LTA bears most of the revenue risk for the bus business.”

The analysts say they will also be keeping a keen eye on a turnaround in rail ridership.

During the FY2020, SBS saw a 42% y-o-y decline in average daily ridership on its train lines at 709,000, due to the pandemic.

“While there have been conflicting views on the future trajectory of work from home, we believe average daily rail

ridership in April 2021 may provide hints on future ridership trends. In April 2021, the government had relaxed restrictions and allowed up to 75% of the workforce to work in office. Correspondingly, average daily rail ridership recovered to 73.9% of pre-pandemic (April 2019) levels,” they note. “For FY2021, we have projected rail ridership to improve to [around] 810,000 before bouncing further to 995,000 in FY2022.”

In addition, the parliamentary discussion on the Downtown Line could also boost sustainability of the train line as well as SBS’s financial performance. The line has been loss-making since it opened in 2013.

For more stories about where the money flows, click here for our Capital section

Finally, the Hong Kong MTR patronage appears to be on a recovery trend, which could provide SBS hints on its future ridership.

Hong Kong has so far contained the Covid-19 pandemic and kept its number of new daily cases mostly below 10 over the past few months.

Restrictions in the city have been gradually eased. To Woon and Yong, the region may offer a peek into commuting patterns in a post-pandemic world.

As at 1.38pm, shares in SBS are trading 1 cent lower or 0.33% down at $3.02, or an FY2021 P/B of 1.5 times and a dividend yield of 2.9%.

Photo: SBS

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