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Implications of SBUS framework agreement

  • We are positive on SBUS’s latest framework arrangement with LTA regarding the DTL financing framework transition and extension of bus packages.
  • While we estimate the P&L impact to be rather neutral, the deal improves the company’s earnings stability, and paves the way for a higher DPR in FY22F.
  • SBUS’s 3Q results were in line; CDG’s were a tad below forecasts. Maintain Overweight; we expect earnings recovery in FY22F with mobility recovery.
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SBUS announces entry of framework agreement with LTA

SBS Transit (SBUS) announced today that it has reached an agreement with Land Transport Authority (LTA) to transition its Downtown Line (DTL) financing framework to New Rail Financing Framework Version 2 [NRFF (V2)], effectively aligning DTL under the same financing framework as other rail lines it operates. Under NRFF (V2) which will be effective 1 Jan 2022, DTL will be able to enjoy lower commercial volatility, given the license charge structure will provide for some risk-sharing with the LTA under a fare revenue shortfall sharing mechanism and an EBIT cap and collar mechanism. Along with this adjustment, SBUS also announced that it has extended the tenure for 5 out of its 9 existing bus contracts by an average of 3 years, at a rate that is benchmarked against recent bus tenders and lower than the current service fee (effective 1 Sep 2022).

Rail gains offset bus losses

We believe overall financial impact for FY21-23F from the announcement to be rather neutral, with gains in the rail segment offsetting losses in the bus segment (see Fig. 1). With the transition to NRFF (V2), we estimate SBUS’s rail segment could see lower losses by at least S$30m p.a. from FY22F onwards under the risk-sharing model, given DTL has been loss-making even prior to the Covid-19 pandemic due to slower-than expected ramp-up of ridership. However, this will be offset by lower service fee for the renewed bus contracts, which we estimate at c.S$34m impact on an annualised basis.

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3Q21 results: Bumpy recovery

SBUS’s 3Q21 results were in line with our expectations, but ComfortDelgro’s (CDG) came in slightly below. SBUS saw a slight sequential net profit improvement in 3Q21 to S$13.9m (+5% qoq,-28% yoy) due to higher service revenue from fuel-indexation and better performance in commercial services. CDG’s 3Q21 core net profit of S$25.8m (- 26% qoq, -34.0% yoy) was sequentially lower due to higher taxi rebates granted and negative impact on Australia’s charter bus business due to lockdowns. On a yoy basis,
net profits of both companies were lower mainly due to lower government grants.

Reiterate sector Overweight

We view the latest announcements as positive to SBUS – we believe the new rail financing framework and extension of bus packages help to improve earnings stability, and are supportive of our thesis that SBUS has room to increase its dividend payout ratio in FY22F given its strong cash generative business and robust balance sheet. Reiterate our Overweight call on the sector, as we expect earnings improvements in FY22F as economies shift to managing Covid-19 as an endemic situation.