SBS Transit Limited (SGX: S61), or SBST, is a leading bus and rail operator in Singapore. The group is majority-owned by ComfortDelgro Corporation Ltd (SGX: C52), it operates more than 200 bus services, and it has a fleet of more than 3,000 buses. SBST also operates two MRT lines: the North East MRT Line and the Downtown MRT Line.
When I search for suitable investments, my ideal investment consists of a mix of growth and yield. The growth aspect ensures the company continues to increase both its profit and free cash flow, resulting in a higher share price over time. The yield aspect pays me to wait, as I will be receiving passive income while waiting for the company to execute its growth plans and strategies.
I believe SBST offers a great mix of both growth and yield, and here are two reasons I believe this can continue.
1. Application for a fare increase
Ever since SBST transitioned to the new Bus Contracting Model (BCM) back in 2016, it has seen net profit and free cash flow rise steadily. The government announced the BCM back in 2014 as a method to enable transport operators to focus more on maintenance, upkeep, and operations, and to free up heavy capital expenditure on hard assets that can distract management’s focus. As a result, SBST’s growth over the last 3 to 4 years has been phenomenal, with net profit more than doubling from S$31.3 million in FY 2016 to S$80.1 million in FY 2018.
In late September, public transport operators formally submitted applications for a fare increase, and this could see bus and train rides costing up to 7% more. I believe SBST can continue to grow because of the need for fare increases to keep pace with operating costs as well as the growth of the Downtown Line as it reaches full capacity over time.
2. Steadily increasing dividends
As a result of rising profit and increased free cash flow, SBST has also jacked up its dividends significantly over the last four years. Investors who purchased shares many years ago have enjoyed rising dividends as SBST’s dividend has increased by almost 600% since 2014. For H1 2019, the interim dividend declared was 7.15 Singapore cents, a 23.2% year-on-year increase. The trailing-12-month dividend yield for SBST was 3.5% (based on the last traded share price of S$4.07).
Mindful of valuations
Investors, however, need to be mindful of valuations and future prospects when considering SBST. The group is trading at around 15 times earnings now, along with a historical dividend yield of 3.5%. The benefits of the BCM have already been incorporated into earnings and free cash flow over the last three years, so investors need to ask if there is room for further upside in terms of profit.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of SBS Transit Limited. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.
Motley Fool Singapore 2019