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More clarity needed before turning positive

  • 3Q21 results largely in line; Revenue rises but operating profit dips y-o-y
  • Downtown Line to transition to National Rail Financing Framework (Version 2)
  • 5 bus packages see 3-year term extensions albeit at a lower service fee value
  • Maintain HOLD with slightly lower TP of S$3.39

Investment Thesis

New framework agreement with LTA offers stability but may limit growth based on our estimates. The lower service fee from the bus packages may be offset by the revamp in the licence charge for the Downtown Line. That said, rail EBIT will now be mostly shared with the LTA through the EBIT cap and collar mechanism.

Valuation is fair for now. Our TP of S$3.39 represents SBST’s 10-year mean PB of 1.74x. We used a 10-year period to adjust for a short-lived spike in SBST’s share price in 2019. In addition, SBST trades at a FY22F PE of 18.8x which is approaching SBST’s 10-year mean forward PE of 21x.
Extent of recovery in rail ridership is uncertain. Total average daily rail ridership across SBST’s train lines was at c.1.22m in FY19 compared to c.709,000 in FY20, a c.42% decline. The future trajectory of commuting remains murky, and we believe average daily rail ridership is likely to take time to recover. While we have projected average daily rail ridership to increase to c.750,000 in FY21F and c.940,000 in FY22F, these remain depressed when compared to FY19.

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Valuation:

Lower TP slightly to S$3.39. Our valuation was obtained by pegging SBST to its 10-year mean PB of 1.74x. We believe SBST is currently trading near its fair valuation. 

Where we differ:

We are more cautious on the stock given the uncertainty in the COVID-19 situation and possible structural trends depressing rail ridership.

Key Risks to Our View:

Downside risks include loss of bus packages in 2023, a significant permanent decline in public transport ridership, and resurgence of COVID-19, leading to tightened restrictions.