SBS Transit

Price target:

CGS-CIMB “add” $3.40

Betting on ridership recovery

CGS-CIMB Research has initiated coverage on SBS Transit with an “add” rating, making it the first brokerage in Singapore to do so. CGS-CIMB has also given the stock a target price of $3.40.

Analysts Ong Khang Chuen and Darren Ong are positive on the counter as they expect passenger traffic on public transport to return to around 90% of pre- Covid- 19 levels by FY2021F.

They are also upbeat on the stock due to its position as a market leader in the public bus industry, which generates defensive earnings and stable cash flow under the Bus Contracting Model (BCM).

Since the lifting of the “circuit breaker” measures in June, ridership on SBS Transit’s buses and trains have “steadily improved”. SBS’s rail ridership rose to around 55% of pre-Covid-19 levels in August, five percentage points up from the 50% logged in July.

With Singaporeans resuming social activities and Covid-19 community cases remaining low, both analysts see room for further relaxation of safe distancing measures that could lead to higher ridership numbers.

While ComfortDelGro owns a 74.4% stake in SBS Transit, the analysts say they “prefer” the latter due to better earnings protection from the Covid-19-induced social distancing measures. SBS Transit also offers direct exposure to potential catalysts such as tender wins for Bulim and Sembawang-Yishun bus packages, and reforms in the rail financing policy.

“With strong free cash flow (FCF) generation post the implementation of the BCM in 2016, SBS Transit has turned into a net cash position by end 1H2020,” they write in a note dated Sept 18.

“We see upside to its dividend payout ratio (FY2019: 50%) post earnings normalisation, as its parent company ComfortDelgro had a dividend payout ratio of 80% in FY2019,” they add.

Believing that the worst is over for SBS Transit, the analysts estimate a net profit recovery (+35% y-o-y) in FY2021F.

“SBS Transit currently trades at 11.7x CY2021F price-to-earnings ratio (P/E), or –0.5 standard deviation (s.d.) below its 5-year historical average, which we think hasn’t factored in the recovery scenario and potential catalysts,” they say.

For FY2020F ending December, the analysts have estimated a price-to-book value (P/BV) of 1.58x and dividend yield of 3.17%.

However, they add that a key downside risk to the stock is a slow pace of rail ridership recovery.— Felicia Tan