SBS Transit: Good Dividend Stock, Upside with Recent Public Transport Fare Hike

Most of us in Singapore knows SBS Transit (unless of course you are too rich that you drive a car or two in Singapore).

SBS Transit operates bus services, North East MRT Line, LRT Lines and Downtown Line in Singapore. Its revenue is tied to the fares collected. So with the expected 10 cents or 6% rise in fares, SBS transit is expected to report profits increase. What is the expected profit increase?

Expected Profit Increase in Public Transport Services Segment for SBS

In December last year, Singapore saw fare hikes of about an equal magnitude as what was announced a few days ago. As a result, SBS saw a rise of about SGD$8 million in pre-tax profits. Factoring in taxes, SBS Transit could be gaining an addition $6.8 million in profits (EPS 2.16 SG cents). On a full year basis, I am expecting SBS Transit to see an increase of 4.2 SG cents for next year.

Dividend Policy

SBS has a dividend policy of giving  at least 50% of earnings ("EPS"). Based on this year's earnings ("EPS"), one can expect a EPS of 21 cents; after factoring the effects on SBS needing to pay more for for advertisement spaces at bus terminals and MRT stations. Adding an expected increase of 4.2 SG cents EPS from the fare hikes, this puts EPS at 25 cents and I expect next year dividend to be about 12.5 cents.

Cash Cow

Due to its public transport business, SBS is a cash generating business and due to its small 50% payout ratio for dividend, SBS has now amassed a cash balance of $320 million (43% of its market cap) and 4 months worth of its operating expenses. With such a large cash balance and cash generation ability, I would say the company is able to continue paying 50% in earnings as dividend. There is a small chance that a special dividend can be announced but that depends on if it needs to transfer cash to Comfortdelgro (its parent)

Are Shares Worth a Buy Now?

At $2.38 share price, I would say SBS Transit is fairly valued based on the dividend metric. A 5% dividend in current climate is acceptable where a large part of its revenue is dictated by the public transport council.

I view it on par with other strong name REITs. However, with about 12% of fare hikes still required to be adjusted; for next year, I expect another 10 cents increase in fares. So we could be seeing an end state where SBS becomes a 30 cents EPS, 15 cents dividend company.

For investors who wishes to take a lower level of risk, SBS transit is a good buy with prospects of seeing growing profits at a faster clip than say Sheng Shiong. So between Sheng Siong (Current yield of 4.3%) vs SBS transit ( Current yield of 4.6%), I would pick SBS Transit.