Brokers' take: DBS initiates coverage on SBS Transit with 'hold', S$3.44 target price

DESPITE recent developments in Parliament that hinted at potential support for the Downtown Line, DBS Group Research said it is "erring on the side of caution" for land transport operator SBS Transit, given the government's outsized fiscal measures provided in view of Covid-19.

On Thursday, it initiated coverage on the stock with "hold" and a S$3.44 target price to represent 21.7 times FY2022 price-to-earnings (P/E) estimates. This target is close to the stock's 10-year mean forward P/E of 21.2 times, as well as its 10-year mean price-to-book value (P/B) of 1.74 times.

Its analysts noted that at its last traded price of S$3.03 on Sept 1, the stock was around its peer average P/B of 1.6 times and therefore near its fair valuation, in their view.

"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 810,000 in FY2021 and 995,000 in FY2022, these remain depressed when compared to FY2019," said the research house in its report.

"FY2022 revenue for the bus business will likely be relatively stable as SBS Transit only collects fares on behalf of the Land Transport Authority (LTA). In other words, the LTA bears most of the revenue risk for the bus business," observed DBS.

While the Public Transport Council has recommended public transport fares remain unchanged to support commuters amid the pandemic, DBS analysts are projecting a 7 per cent on-year increase in FY2022, partially to make up for the unchanged fares in 2020 and also in view of rising cost pressures. This would translate to a 7.3 per cent rise in estimated FY2022 group revenue to S$1.38 billion.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Revenue from higher public transport fares would however be offset by a tapering of government support measures, noted the analysts, as they believe the Jobs Support Scheme is unlikely to be extended given the improving pandemic situation in Singapore.

"SBS Transit would thus have to record higher ridership figures or lower costs to make up for the shortfall even as it grapples with potential structural changes in work patterns," said the analysts.

"A significant revamp of the Downtown Line financing framework leading to profitability; a turnaround in rail ridership coupled with higher-than-expected fare revision; or the award of a new bus package tender will be upside to our base-case assumptions," they added.

As at 3.31pm on Thursday, shares of SBS Transit were trading at S$3.04, up S$0.01 or 0.3 per cent.