Why SBS Transit Opened 9.2% Higher Today

The past few years has certainly been eventful for public land transport outfit SBS Transit (SGX: S61). Seeing the company’s profits drop from S$54.6 million in 2009 to a loss in the latest quarter has not been fun for shareholders. Along the way, SBS Transit’s share price has also suffered, falling from a peak of S$2.11 in 2011 to a low of S$1.16 that was reached this year.

Suffice it to say that things haven’t been looking too rosy for the company. However, there seems to be some spark with the company recently and just today, SBS Transit has managed to open at a price of S$1.52 – that’s 9.2% higher than its closing price of S$1.41 yesterday. What has caused the jump?

New bus contracting model from the authorities

Turns out, the government had just released a new business model plan for public bus operators in Singapore. SBS Transit, which controls about 75% of the scheduled public bus business in Singapore, would be the one that’s impacted the most – in a positive way. The next biggest bus operator is SMRT Corporation (SGX: S53), and it too would likely see the new contracting model as great news for it; shares of SMRT had opened with a 2.7% decline to S$1.40, however.

Currently, both operators are facing losses in their bus businesses due to: 1) Rising costs (inflationary pressures on fuel and labour expenses have contributed to the issue); and 2) an inability to pass on cost increases to consumers as public transport fares have a strong element of governmental control.

Although the government has agreed to fare adjustments which had taken place in April this year, many observers of the industry still feel that a more sustainable solution is needed for the bus service providers in Singapore. This is where the new bus contracting model comes in.

With the new model, which will be implemented in the second half of the year, the government will be the main asset owner of all buses and related-infrastructure while the operators will need to bid for the rights to operate certain routes through a competitive tendering process. This means that current operators will not need to maintain the large capital expenditures that are required for the maintenance and purchase of buses. Under the new model, the operators will earn a service fee from the government to operate their chosen routes while all revenue from fares will go to the Land Transport Authority. This will help maximise chances that operators can earn a reasonable return for providing their services while allowing the government to gain control over the expansion of bus routes.

Foolish Summary

Although this new model would lower the costs of entering the public bus service industry, thus promoting more competition in the market, SBS Transit would have a lot more to gain from the sweeping changes made to the industry due to its current position as the incumbent and undisputed market-leader.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns shares in SBS Transit.