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Public Transport Fare Increase: Buy SBS Transit (SGX:S61) to hedge?

SG, Stocks

Written by:

Alex Yeo

Singapore’s Public Transport Council (PTC) announced that adult card fares will increase by 10 cents for up to 4.2km and 11 cents for distances above that, while adults who choose to use cash to pay for their bus rides will see fares increase by 20 cents.

But wait, there’s more…(increments)

This year’s increase of 7% is only a portion of the maximum allowable fare adjustment quantum of 22.6%, which includes last year’s deferred increase of 10.6% and this year’s 12%.

If 7% sounds like a lot, be warned that there’s still a headroom of 15.6% hike that is being deferred to future fare review exercises.

The PTC chief executive also agreed that the rolled-over numbers indicated more fare hikes in the next few years. He said:

“If we had done the full maximum allowable fare increase of 22.6%, it will translate to about 30 cents per journey for all commuters.”

If you’re reading this, you’re probably an investor.

Since SMRT is already delisted, you may be wondering if you can hedge against the fare increase by investing in SBS Transit.

Let’s explore the upfront investment cost and take a deeper look at SBS Transit’s business to see if that’s a good strategy.

How many shares of SBS Transit you need to buy to hedge against the annual fare increase?

SBS Transit currently trades at $2.58 and provides an annual dividend of $0.11 per share.

If you spend $130 monthly or $1,560 annually on public transport, with the current increase of 7%, you would pay $109 more in fares. To hedge this increase, you would need to own ~1,000 shares in SBS Transit which would cost $2,580 (before trading fees).

If you’re more ambitious and want to have your entire public transport fare covered by dividends from SBS Transit, you will need to own ~14,000 shares which would be $36,120.

Now that we have an idea of the upfront investment, let’s take a deeper look at the details.

But first, you need to understand that:

SBS Transit will not pocket the full 7% fare increase

Only SBS Transit’s train segment will benefit from the annual fare increase.

The bus segment will not.

Why?

Under the bus contracting model, the Government retains the fare revenue and owns all infrastructure and operating assets such as depots and buses. Bus operators are contracted and paid to operate public bus services through a competitive tendering process. Hence, only the Government bears revenue risk.

The rail segment operates under the New Rail Financing Framework (NRFF), which means Land Transport Authority (LTA) shares the fare revenue risk with the train operator. The LTA also owns the assets while the train operators are responsible for maintenance.

SBS Transit operates a total of 78 stations, comprising:

  • 16 MRT stations on the North East Line (NEL),
  • 34 MRT stations on the Downtown Line (DTL), and
  • 28 Light Rail Transit (LRT) stations on the Sengkang-Punggol LRT (SPLRT) systems.

With a combined rail network spanning 83km equivalent to a market share of 30.6%.

but SBS Transit may be able to get more train lines soon

In May 2023, the LTA has called for tenders to appoint operators for the upcoming Jurong Region Line (JRL) and Cross Island Line (CRL).

JRL will support the growth of the Jurong area while CRL will connect major hubs that are under development in the eastern, western, and north-eastern parts of Singapore such as Jurong Lake District, Punggol Digital District and Changi region.

The successful tenderers will be paid a service fee to operate and maintain the JRL and CRL for the first licensing period of nine years, with the possibility of a two-year extension.

During the first licensing period of the JRL and CRL, the Government will bear fare revenue risk under the same model as the Thomson-East Coast Line (TEL), given the higher fare revenue and ridership uncertainty in the initial years of operation for such new lines.

Subject to the assessment of bids, LTA may award licenses for both lines, or for only JRL, by end of 2024.

The most recent tender was for the TEL which SMRT won with a bid of $1.7 billion in service fees for a 9 year period or $189 million per annum. This bid was reported to be 30% lower than that quoted by SBS Transit.

Currently, SMRT operates 4 MRT lines and 1 LRT line while SBS Transit operates 2 MRT lines and 2 LRT lines. For completeness, SMRT is also the joint operator of the upcoming Johor Bahru- Singapore RTS Link.

Some market watchers have speculated that the authorities will try to divvy up the pie such that the workload and revenue growth is spread evenly amongst the two existing rail operators. With this in mind, some investors are hopeful that the next tender would be awarded to SBS Transit.

So, if SBS Transit successfully wins the new lines, how much revenue would that rake in?

Given that the latest TEL has 43km of rail network while the JRL has 24km, from a simple proportion of the distance, there could be a potential revenue upside of at least $100 million annually.

Should you spend $36,120 on SBS Transit shares?

SBS Transit operates in a highly regulated duopoly for its train services and an oligopoly for its bus services in which it is the dominant player with 62% of market share.

With the resumption of regular activities, demand for rail services has grown significantly:

  • NEL grew by 25.4% to 558,000 passenger trips
  • DTL by 32.2% to 433,000 and
  • SPLRT by 22.8% to 157,000. 

The trips for the DTL and SPLRT have both exceeded pre covid levels while ridership on the NEL is still 7% below 2019 levels, although it continues to recover.

SBS Transit expects revenue in 2023 to be stable as revenue for the first six months of 2023 increased by 1.6% driven mainly by higher rail revenue from higher ridership offset by lower bus revenue due to lower service fees.

Although SBS Transit is maintaining a cautious outlook due to cost uncertainties arising from inflation, tight labour market and energy prices, the fare hike would likely go some way in growing its revenue and mitigating SBS Transit’s cost uncertainty.

Looking at SBS Transit’s 2022 results, it is still operating below its peak earnings per share and dividend payout:

Nonetheless, SBS Transit is currently trading at a reasonable P/E of 11.8x and yielding 4.28% at a 50% payout ratio.

Taking the potential upside in place, we think SBS Transit is worth some allocation as part of an overall portfolio as a hedge against the annual fare increase.

Of course, if you’re familiar with Singapore stocks, you may also be wondering about Comfortdelgro (CDG) (SGX:C52).

CDG owns 74.43% of SBS Transit which accounts for ~50% of CDG’s revenue. Although this would make CDG the second biggest beneficiary of the fare hike, CDG has its own problems to handle and may not be the best option as a hedge.

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