SBS Transit Limited (SGX: S61) is a provider of both bus and rail services in Singapore. For bus services, the group runs multiple bus packages that it successfully bid for from the government. Under the rail services business, SBS Transit operates Singapore’s North East Line (NEL), the Downtown Line (DTL), and the Sengkang and Punggol Light Rapid Transit (SPLRT). SBS Transit is 75% owned by land transport conglomerate ComfortDelgro Corporation Ltd (SGX: C52).
In 2016, the Singapore government announced a new Rail Financing Framework (RFF), which would be implemented in phases. Under the previous network, rail operators would own and maintain their operating assets and were in charge of building up, replacing, and upgrading them to ensure the smooth running of operations for commuters. Under the RFF, the Land Transport Authority (LTA) would buy the operating assets at fair value, and SBS Transit would then pay an annual license charge for the right and responsibility to operate and maintain their rail lines in order to earn revenue from them.
Transition to the RFF
SBS Transit formally moved to the new RFF in April 2018 for the NEL and SPLRT. The LTA also owns and pays for the operating assets, including additions, renewals, and replacements. This new model has since made SBS Transit much more asset-light, as it need not spend significant amounts of money on capital expenditure. A new license with a period of 15 years that commenced on 1 April 2018 has replaced the previous license, with a possible extension of a further five years.
Financial impact of new RFF
Revenue climbed over the last two full financial years, but operating and net profit soared by 50.3% and 70% year on year, respectively for FY 2017 and FY 2018. Net profit attributable to shareholders was up 255% in just two years (i.e., 2016 to 2018). As a result of cost savings and being freed from the need to spend on maintenance for the assets, SBS Transit has seen profits exploding upwards.
Dividends on a tear
Along with its improved business performance, SBS Transit has also hiked its dividends significantly. For 2016, the dividend per share (DPS) was 2.7 Singapore cents. This jumped to 3.95 Singapore cents in 2017, and 7.1 Singapore cents in 2018. In just two years, DPS has increased by 262%.
The new model is beneficial for SBS Transit
The new RFF is obviously beneficial for SBS Transit, as it enables the company to cut back on expenses and therefore generate higher levels of operating and net profit. As a result, cash flow also improves, and the group is able to declare higher levels of dividends. Moving forward, investors need to assess if these benefits are going to continue to accrue to SBS Transit, as the group continues to improve on both bus and rail ridership.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned. The Motley Fool Singapore has recommended shares of SBS Transit Limited.
Motley Fool Singapore 2019