Most Singaporeans may recognise SBS Transit as a bus operator and SMRT as a train operator. But not many people may know that SBS Transit also runs rail services for the Downtown Line (DTL), Northeast Line (NEL), and Sengkang-Punggol LRT line in Singapore.
This lack of recognition that SBS Transit also operates rail services could be a blessing in disguise for the company. Simply because whenever there’s a train service disruption, the blame often goes to SMRT!
Before opening the floor for questions at the 2019 SBS Transit AGM, Chairman Lim Jit Poh reminded shareholders not to ask questions related to the breakdown of revenue by rail or bus; the management does not disclose the details due to commercial sensitivity. SBS Transit has to bid for bus tenders under the new bus contracting model (BCM) and publishing their operating margins may give clues to how much the company could bid for their next contract. Therefore, the information is deemed to be highly sensitive. By keeping their margins confidential, this helped SBS Transit win two out of four contracts at the first open tender exercise when the BCM came into effect.
As an investor, I was eager to know when SBS Transit would decide to increase its dividend payout ratio since its business is now less capital intensive due to the new bus contracting model. Here are seven things I learned from the 2019 SBS Transit AGM:
1. SBS Transit has around 60% market share in Singapore from running nine out of 14 bus packages in 2018. These made up 222 bus services with a total fleet size of 3,417 buses, an increase of 225 buses from the year before. The company employs around 6,600 bus captains to run the bus services. SMRT is the second largest bus operator in Singapore with market share of around 25%. The other two bus operators, Tower Transit and Go-Ahead (both UK-based), split the remaining market share with approximately 8% and 7% respectively. According to CEO Yang Ban Seng, market share is estimated using the total number of bus services in Singapore.
2. As per the BCM, bus operators like SBS Transit are rewarded with incentives if they improve service reliability but penalized if service reliability falls. A shareholder asked how much the company received in incentives from the Land Transport Authority (LTA) but the board felt it was better not to publicly disclose the information. Having said that, the company performed well in 2018 and the incentives were shared with the bus captains for their good performance.
3. The LTA awards bus contracts to whoever can offer the best in terms of quality and price, and not who simply offers the lowest bid. The objective of the BCM is to improve bus journeys for commuters by introducing competition. As a result, SBS Transit has to compete with other players like SMRT, Go-Ahead, and Tower Transit. When the first contract was put out for tender in 2015, Tower Transit won the contract despite SMRT pricing their bid over S$100 million lower. The LTA awards the contract after considering quality factors proposed by each bidder.
4. Eighty percent of the bus fleet currently operated by SBS Transit is owned by the company. Under the BCM, the LTA owns all operating assets including buses and leases them to operators in Singapore. However, because SBS Transit still owns legacy buses from before the BCM was implemented, the LTA agreed to lease these buses from SBS Transit and pay the company a leasing fee based on the depreciation of the buses over their statutory lifespan. The company received S$99.3 million in lease revenue in 2018.
5. SBS Transit is still responsible for some capital expenditure – S$27.8million in 2018 — despite moving to the BCM. The chairman explained that SBS Transit still needs to spend on bus accessories, computer equipment, refurbishment and renovations, and other necessary maintenance. Therefore, he expects the company to continue incurring around S$25 million in capital expenditure annually.
6. SBS Transit will maintain its dividend payout ratio of 50% and there is no plan to change this for now. The company would consider increasing the payout only when it deems it sustainable. As SBS Transit still has a net debt position, it is unlikely the payout ratio will be increased for 2019. A shareholder asked if the company plans to pay a quarterly dividend since it now requires less capital to operate its business. The chairman gave a blunt ‘no’ and said that dividends would continue to be paid semi-annually.
7. SBS Transit needs the DTL to carry a daily ridership of 650,000 to break even. The rail line went fully operational in October 2017 after all 34 stations were opened and made its first full-year contribution in FY2018. Average daily ridership for the DTL soared from 279,116 to 449,588 riders in 2018. Despite the improvement, the line remains unprofitable. A shareholder wanted to know how the company planned to hit its breakeven ridership numbers since SBS Transit is only contracted to run the DTL until 2032. The chairman said ridership would depend on population growth and the government’s initiatives to move the population to a car-lite society and encourage public transport. He added there’s always risk in running a business and one reason why the company needs to hold extra cash to buffer against any difficult circumstances.
This article is written in support of the SIAS Q&A on Annual Reports initiative to raise the standards of AGMs, and encourage minority shareholders to ask questions, engage, and interact with the management of listed companies. Founded in 1999, SIAS is a registered charity, Institution of Public Character, and industry watchdog that aims to promote exemplary standards of corporate governance among Singapore-listed companies to ensure that investor rights and interests are protected.
Thanks very much for your write-up on SBS Transit FY2018 AGM.
You indicated that SBS Transit needs the DTL to carry a daily ridership of 650,000 to break even.
(1) What is the current daily ridership for the DTL? Can we find the ridership nos. in SBS Transit website, Annual Report and/or Quarterly Report?
(2) SBS Transit also runs the Northeast Line (NEL), and Sengkang-Punggol LRT Line. What about the break-even daily ridership for these two Lines? Available in their website and/or financial reports?
Hi anon, you’re most welcome. Regarding your questions, you can find the ridership information in the annual report. The NEL and Sengkang-Punggol LRT lines are profitable but there is no breakdown provided.
How would you value SBS & explain the recent surge.
DO you think if there’s still room for growth & dividends substainable in the long run?
If you look at their recent results, we can see that SBS reported higher profit which leads to higher dividend payments by almost 70%. The new BCM model allows SBS to do a higher payout ratio as they no longer need to spend heavily on CAPEX to buy buses. Once the company pays down its debt fully, we are expecting a higher payout ratio (similar to what happened with VICOM) if the board doesn’t retain/reinvest the cash.
At current price point, I think the growth is limited but if the Downtown Line — which is currently loss-making — can reach a tipping point and become profitable, then we may see another run for the company.