SBS (S61) first caught my eye in December 2018. At that time, the public transport counsel announced that fares will be going up soon. It soon lead to a 50% increase in share price at that time. An opportunity came again during COVID-19, share prices has came back to Pre-Dec 2018 levels. I will be sharing why I think there will be a potential 50% gain in this boring company.
What do SBS do?
SBS is a boring business. Basically, they run the following routes in Singapore. They run basic bus services, Chinatown direct bus, services, Express bus services, Nite Owl bus services, City direct bus services, North East Line, Downtown Line, Sengkang LRT, Punggol LRT, advertisement on bus, trains, bus hubs, train station and management shop and road show space.
It is pretty much an essential services and they have a market share of 61.1% market share as a public bus operator in Singapore.
Bus services comes under the BCM (Bus Contracting Model). SBS have to obtain the license to run the bus fleet. You can see from the link that SBS has the license to run the fleet in different areas with the immediate upcoming renewal in 2021 all the way to 2026.
*As the provision of bus services now comes under the BCM, the fare revision (in Dec 2018) affects only on their rail revenue.
Why is it an opportunity now?
The effects were felt during circuit breaker as we were forced to be at home. We probably go to our nearest supermarkets and shopping centers. This affected bus ridership heavily and can be seen in the H1 financial report. The circuit breaker started on 7 April 2020 and ended on 1 June 2020. The circuit breaker lasted for 1 month and 3 weeks. However, this does not include any prelude and also the after effects of the circuit breaker where people were still asked to work from home if possible. After the circuit breaker, rail ridership was at about 50 per cent of what it was during the pre-pandemic period.
On the top line, revenue dropped by 14.9% as compared to the previous year. This is to be expected as most of us spent around 2 months at home during the circuit breaker. (Just think about it, are you taking more bus rides as compared to the circuit breaker period?) Therefore, I expect the Next Half Year report will show a strong growth.
Depending on how they report it 2nd Half Year, they probably will report ~75% growth of operating profits as compared to 1st Half 2020.
What other reasons?
SBS is in a strong cash position. As of 30 June 2020, it had short-term deposits and bank balances of $94.5 million. After accounting for borrowings of $75 million, it was in a net cash position of $19.5 million.
It pays a good and sustainable dividend yield of ~4.5%.
It is currently undervalued based on a simple discounted cashflow model.
It is a stock that is position nicely to be normalized and the public transport section remains to be disrupted.
Very simply, there is little/no growth story to this company.
Secondly, new contracts might be awarded to new competitors to create competition. Recently, Tower Transit edges out SMRT to win $1.03b Bulim and Sembawang-Yishun bus packages. Tower Transit bidded $1.03B as compared to SMRT $1.19B. Personally, I find this will become worrying if this becomes a price war. SBS and SMRT may no longer be good cash cows in future.
Final thoughts by Wealthdojo
Most people will not entertain any investment ideas if it doesn’t have SaaS or Data in their business model now. However, I find that there are many opportunities in good old boring businesses that are positioning themselves to recovery and SBS is one of them. If things normalised, I expect prices to return to $4 region early 2021 with an upside of 50%.
I think it is understood that this should not be taken as a buy/sell recommendation. Please do your own due diligence in your investment.
PS: Here is a video on an explanation of BCM.
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