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Does SBS Transit Limited Have a High-Quality Business?

Royston Yang

SBS Transit Limited (SGX: S61), or SBST, is a public transport operator in Singapore operating bus, rail, and taxi services. SBST is the major bus operator in Singapore, with a 61% share of the market and a fleet of more than 3,400 buses. The group operates more than 220 bus services in Singapore.

SBST’s business model has undergone major changes in the last five years, with the new Bus Contracting Model (BCM) announced in 2014 and then implemented in 2016. Essentially, the BCM will shift the ownership of all bus assets (such as buses, bus depots, bus interchanges, and fleet management systems) to the government under Land Transport Authority (LTA). LTA will then act as the central bus planner and mandate the service standards that operators (such as SBST) have to meet.

Bus operators then have to bid for preferred routes, and fare revenue will be retained by the government in order to ensure fares are affordable. New operators such as Tower Transit Singapore and Go-Ahead Group PLC (LSE: GOG) entered the industry and began to bid competitively for bus service routes. Each operator is in charge of the maintenance and upkeep of bus interchanges and buses as well as their onboard equipment.

With such a drastic change implemented, investors may wonder if SBST still has a high-quality business. Let’s take a look at three aspects of its business to determine this.

Financials and margins

SBST’s revenue has steadily increased as the BCM kicks in, as the group has a 61% market share of all bus routes despite the new competition. Note that since 2015, the group’s operating profit has almost quadrupled from S$25.2 million to S$97.3 million as the LTA takes ownership of all bus assets, thus freeing up the need for the group to record depreciation. As a result, both operating and net profit margins have improved significantly over the last five years.

Free cash flow

The group’s free-cash-flow (FCF) profile improved significantly from 2016 onwards, as SBST was freed up from heavy capital expenditures relating to bus assets after LTA took over all assets that year. Operating cash flow immediately improved and has trended up strongly, while lower capital expenditure requirements also meant SBST could now generate significant amounts of FCF.

Dividends

SBST has shown a stellar track record of dividend increases despite the BCM only formally kicking in from 2016. From a total of 2.3 Singapore cents in 2014, the annual dividend has increased by almost 600% to 12.9 Singapore cents in 2018. With continued strong performance in both the top and bottom lines, H1 2019 saw its interim dividend rise further to 7.15 Singapore cents from 5.8 Singapore cents a year ago.

Investors can look forward to an even better annual dividend for 2019, barring unforeseen circumstances.

The Foolish conclusion

Due to the implementation of the BCM, SBST’s margins, FCF, and dividends have all shown tremendous improvements. As this is a structural and permanent change for all bus operators, it is very likely this performance will continue to strengthen. It certainly seems as if SBST does indeed have a high-quality business model.

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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