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Sunday, 14 September 2008

Public Transport Companies --- a good buy?

I read the recent articles on Singapore public transport with both interest and concern, especially on the recent fare hike and restructuring. Public transport is meant for the mass and providing the services at a 'reasonable' and 'affordable' rate should be the main objective for their existence.

Many blog posts and articles were already dedicated to this topic, debating and questioning the need for the increase. I'll hence look at public transport issue from a different angle i.e. investment grade of the public transport companies.

Monopoly?

Valuation

No complex analysis or elaborate ground survey is required for one to conclude that the local transport companies, SMRT and SBS Transit operate in near monopoly in their respective fields, namely rail and bus services. Elimination of service duplication (waste of resources) is the rationale behind the seemingly lack of competition, e.g. removal of bus service once the train starts to run.

If so, aren't these companies a good buy? The following are the litmus test, valuation ratios for SBS and SMRT:

SBS
  • P/E: 12.3
  • Rolling P/E: 15.3
  • P/B: 2.5

SMRT

  • P/E: 20.2
  • Rolling P/E: 19.9
  • P/B: 4.2

A moderately high P/E (above 10) and P/B (above 2) do suggest this from a valuation point of view. i.e. the market could price these with monopolistic premium.

Financial Performance

How about their financial performance? Do they perform as well as a typical monopoly (my criteria) does? i.e.
  • high profit margin (>10%)
  • good profit growth annually (>10%)
  • respectable ROE (>20%)
The following table list the financial performance of the last 3 financial years for SBS and SMRT:

A few conclusions can be reached almost immediately by looking at the table above:
  1. Firstly, SBS's financial performance pales badly compared to SMRT.
  2. SBS's profit margins are below 10 and deteriorating while SMRT's improving and way above 15%.
  3. SBS transits operating expenses rose more than twice as fast as SMRT.
  4. Other than SBS's improving ROE, all its key financial ratios fail to make the grade for a monopoly.
  5. SMRT performed far better. All the key ratio made the grade.
  6. Perhaps that's the reason why they trade at almost twice as expensive as SBS (i.e. 4.2 times book value versus 2.5 for SBS)
  7. Direct government grant (in the various forms to offset asset purchases, trains & buses) as a percentage of earnings is extremely low for SBS as compared to SMRT.

Investment grade analysis

At first glance, SMRT might seem to make investment sense. Looking at the financials results, SMRT are able to achieve record profits year after year with commendable ROE (20's) and profit growth (~10%).

However, things are not rosy as it seems. It could not raise fares as it like. Possibly due to its performance, its fare increases were not approved by Public Transport Council (PTC) while that of SBS were mostly approved. This is the characteristic of a regulated industry.

Looking at their financials and fare approvals/disapprovals by PTC, it seems to me that there is downside protection for both companies. i.e. it is almost impossible to make loss, this is because the companies can be sure to pass on rising business cost to the consumer should the former threaten the bottom line. On the other hand, there is a ceiling to their upside. There is a fare adjustment cap forumula to regulate the fares.

Short Term Outlook

Both companies operate in a tightly regulated industry with SMRT performing obviously better. As a defensive play where the investor is more concerned whether a company will risk bankrupcy, he can definitely sleep well owning SMRT.

Long Term Outlook

A check on the Land Transport Masterplan shows many changes affecting public transport in the coming decade. While SBS and SMRT are expected to continue their existence, by virtue of operating in a tightly regulated, non-competitive industry means that whether they could thrive or die will depend almost solely on the transport policy in the future. Gambling was never legal in Singapore in the past. Two casinos will be ready in the next few years. No one can tell the future.

Conclusion

Public transport is meant for the general public. Keeping it afforable is one of the main objective for the regulators. But to the transport companies, being listed stipulates them to maximises profit for their shareholders. How they manage these conflicting interest will always be a thorny issue.


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6 Comments:

Blogger Mike Dirnt said...

Hi MU,

i wouldnt say its a good buy right now. but certainly someone who is looking for a diversified portfolio would consider adding transportation sector like smrt especially.

SMRT, Singpot, SPH, some of S are not my type :P anyway i got Vicom to have an exposure into the transport services sector. you may want to check out. :P

as for the STI, i got latest results from bloomberg terminal. TTM PE=8.95 TTM PTB=1.566 and forward PE=11.98. im not sure why the TTM PE is different but PTB looks same with mine.

DOW news released a report today which you might interested:

0058 GMT [Dow Jones] Singapore market is trading at all-time low on trailing PE, currently below levels reached in previous crises, says UBS. Broker says STI trades at 10.1X trailing PE vs 11.2X during Asian crisis and 10.9X during SARS. Says while macro outlook challenging, it should not get as bad as in 1998; "the economic fallout is hard to ascertain, but most likely may not match the severity seen during the Asian crisis." Says key difference this time is that regulators in developed markets are turning on the liquidity taps, SGD interest rates should not escalate, fiscal policies unlikely to be tightened. Says stocks that are trading below both Asian crisis and SARS levels on trailing PE include Venture (V03.SG), CapitaLand (C31.SG) and Keppel Land (K17.SG). (KIG)

17 September 2008 at 10:36  
Blogger Market Uncle said...

I'll not touch the transport companies. They are selling at too high a price for their pseudo monopoly.

As for STI, we won't know when it will hit a bottom, or when it will bottom out. But I'd say index (ETF) is at a pretty decent price to get some more.

17 September 2008 at 22:56  
Anonymous cif5000 said...

Always enjoy your writings.

For me, I like to break up the "regulated" business and the "non-regulated" business, and does the valuation based on the latter.

The rental and advertisement segment is really attractive, and when the price is right, the long term buyer appears.

I have written some scratchy analysis...do check that out.

Cheers,
cif5000

19 September 2008 at 22:42  
Blogger Market Uncle said...

Hi cif5000,
Thanks for visiting. Took a look at your site. You actually ran a portal, great work there!

I do agree that both business do have fairly attractive non-regulated, non core business. Unfortunately, the core, transported oriented, regulated portion overshadow these siginificantly.

On the regulated portion, both are over priced.

On the non-regulated portion, it could be more attractive if these could grow further and spun of as separately listed subsidiaries, like SATs to SIA.

Just my point of view.

By the way, added a link to your portal. Thanks for including a link to my blog.

19 September 2008 at 22:54  
Anonymous evden eve nakliyat said...

It is a smart idea for anyone to use vehicle transport services to move your automobile to a new destination, but before you can be sure you are hiring the best company for the job, you have to understand some essential tips that will allow you to make the smart decision.

31 December 2010 at 11:46  
Anonymous Penny Stock Reviews said...

Some of the chinese steel stocks look attractive here.

20 December 2011 at 10:07  

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