Many investors view transportation as an essential public good, and companies that provide such services are normally looked at as “boring” and “slow.” In Singapore, public transport is regulated to some extent, but that doesn’t mean companies within the sector have not provided investors with great returns.
The key is to assess if a transport company has a strong competitive moat, and whether or not it’s subjected to heavy regulatory risks. Structural changes within the sector may also make companies more or less attractive depending on the nature of the change and how it affects each player. Certain government policies will definitely have an impact on public transport operators, but investors need to remember that companies can improve their business performance in other ways to mitigate any negative impact.
Here are two transportation stocks that have provided outsized three-year total returns.
1. SBS Transit Limited
SBS Transit Limited (SGX: S58) is a leading bus and rail operator in Singapore and is a subsidiary of ComfortDelgro Corporation Limited (SGX: C52). The group operates more than 200 bus services with a fleet of more than 3,000 buses, and it also operates two MRT lines: the North East MRT Line and the recently-opened Downtown MRT Line.
SBS Transit was trading at S$2.32 on 30 September 2016, and its most recent share price was S$4.07. The shares have provided investors with a superb capital gain of 75.4%. If we add in the total dividends received during this period (2016 final dividends, 2017 to 2018 full-year dividends, and 2019 interim dividend) of 30.35 Singapore cents, the total return increases to close 88.5%.
The strong share-price performance accompanies the growth in both profit and free cash flow for SBS Transit. The government announced the new Bus Contracting Model (BCM) framework back in 2014, where the Land Transport Authority will take over all bus assets while SBS Transit focuses on the maintenance and upkeep. This frees the group from undertaking heavy capital expenditure that has been depressing profits and sucking up cash, allowing it to report significantly higher profit and surging dividends.
2. VICOM Limited
VICOM Limited (SGX: V01) is Singapore’s leading testing and inspection centre. The group provides a comprehensive range of inspection and testing services in fields such as mechanical, biochemical, and civil engineering. VICOM is also the market leader in vehicle testing and inspection with a close to 75% market share.
VICOM was trading at S$5.70 on 30 September 2016, and it closed at S$7.60 recently for a capital gain of 33.3% in the last three years. If the dividends are added up in the same way as SBS Transit, they amount to a total of S$1.1386, bumping up the total gain to an impressive 53.3%.
VICOM’s business has continued to improve in the last three years, and the group has consistently raised its dividends to reward shareholders. Though the vehicle growth rate has been reduced to zero by the government, VICOM has managed to increase its vehicle inspection fee, while more and more people are retaining their older cars, too, which leads to more frequent inspection requirements.
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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 and VICOM Limited. Motley Fool Singapore contributor Royston Yang owns shares in VICOM Limited.
Motley Fool Singapore 2019