Deep-dive 2021-2: SBS Transit Ltd

SBS Transit (SBUS SP) is a public transport operator in Singapore, focusing on buses and subways.

It was established in 1973 as a merger between three Singaporean bus companies. Since then it has branched out into the operation of mass-rapid transit (MRT) lines as well. Today it operates 3,417 buses across 222 routes as well as 3 out of the 8 subway lines in Singapore: The Downtown MRT Line, the Northeast MRT Line and the Punggol-Sengkang LRT.

What attracts us to SBS Transit is that the rail segment is still unprofitable and thus represents a hidden asset. We think the rail segment will ultimately become profitable. The Downtown Line has the potential to increase its ridership at least 60% over the long run and perhaps even 100%. Living close to MRT stations on the Downtown Line is becoming more popular, and new developments are being built around these MRT stations as well. SBS Transit's excellent track record as a public transport operator puts it at a great position in the tenders for the new Jurong Region MRT Line in 2026 and the Cross Island MRT Line in 2030. There is also a potential for all of Singapore's MRT lines to adopt a regulatory framework similar to the Bus Contracting Model, which would make the segment instantly profitable.

We don't want to downplay the drop in ridership seen so far during COVID-19. Usage of public transport is still down about 20% to late-2019 levels. But as the population gets access to COVID-19 vaccines over the next 7-8 months, a gradual normalisation in ridership is expected and a full recovery is possible by 2022.

With 5% operating margins in the rail segment and usage of public transport to normalise, SBS Transit is likely to reach a 2024e PE ratio of 8.3x. This would imply a theoretical upside to intrinsic value of +80%, assuming a return to SBS Transit's median historical multiple of 15x.

Near-term catalysts include the Bulim and Sembawang-Yishun bus package tenders in 2021 and a recovery in rail ridership following COVID-19. Longer-term catalysts are centred around higher ridership on the Downtown Line over the next few years. There is a risk that SBS Transit loses 1-3 of its existing bus packages in 2023.

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