Is it Worthwhile Investing in Public Transport Operators? (Part 1)

With the dust settling on Tuesday's peak hour breakdown of both the North-South Line as well as East-West Line, I was just thinking if public transport operators (PTOs) make good investments. With the calls to make SMRT private, reducing train fares and the possible $50 million fine slapped on SMRT for the recent disruption, I'm not so sure any more, so this is just going to be a brief analysis of the 2 main public transport operators: SBS and SMRT, focusing largely on their profits instead of overall health (balance sheet, cash flow, etc.)

(Image source: https://twitter.com/sbs_transit and http://www.smrt.com.sg/Media/Press-Releases)

Just looking at the P/E ratios already seems scary. The P/E ratio of SMRT and SBS Transit are 24 and 34 respectively. While PTOs have stable and predictable income stream, however with the recent breakdowns and introduction of hefty fines, there needs to be a larger margin of error should any major service disruption occur. SBS Transit even offers a lower return that the 30-year SGS bond (3.04%) at the current P/E ratio!

There may be a bright spot from the change to the new Government Contracting Model, which would remove the loss making business from SBS and SMRT, as well as the possibility of a special dividend after the government purchases their bus assets. But if we remove the money-losing bus operations from SBS and SMRT, their profits only increase by 25%, still maintaining the high P/E ratio, so we'll have to look to the special dividend to decrease our investment to increase the P/E ratio. A bus tender may also help to increase the profits of the two companies, but I'm not very sure on their chances of winning

But we do not know how much the government will be purchasing the respective companies' bus assets yet, so we cannot estimate how large the special dividend will be. If it is sufficiently large, it would be able to reduce our total investment in the two companies and hence increase our returns. The two companies will also continue running some bus services for the time being until 2021 under the new framework model, but still not sure of the fees they will be paid.

On the flip side, there are many possibilities for the two companies' profits to be eaten up. With the recent calls to reduce the fares of public transport (this will affect mainly their train as the fare revenue for buses will be collected by the Government under the Contracting Framework Model), the public transport operators may have to relent and decrease or maintain fares, hurting their bottom line. A train disruption like Tuesday's one will also affect the operators.

The two PTOs look like they need for all the stars to be aligned in their favour if they would like to provide even a decent return to its investors, making it very difficult to call them good investments. (I may come around to doing a more detailed analysis of the company's in terms of their balance sheets, cash flow, etc. another time)

Update: Here's the link to the second part that I've mentioned about in this post (also changed the name of this post to match the second part): Is is Worthwhile Investing in Public Transport Operators? (Part 2)
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