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Is The New Public Bus Contracting Model Enough To Bring SMRT Corp Back To Life?

Expectations are running high for the public transportation sector in Singapore ever since the Land Transport Authority unveiled a new public bus contracting model last week which would see the government become an owner of operating assets related to the public bus industry.

The share price of SMRT Corp (SGX: S53), one of the two publicly-listed public bus operators here, has risen by more than 40% since its lowest point in April this year.

Over the past four years, shares of SMRT Corp have been dragged down from an all-time high of around S$2.30 in July 2010 to a low that’s just above S$1.00 in April 2014. Cost pressures have been mounting for both the company’s rail (i.e. running trains on Singapore’s Mass Rapid Transit and Light Rail Transit system) and public bus business; profits have cratered from S$163 million for the financial year ended March 2010 (FY2010) to S$62 million for FY2014. This happened despite revenue increasing from S$895 million to S$1.16 billion.

Following the new public bus contracting model, there’s a real chance that the public bus industry can return to its past glory. However, the issue here for SMRT is this: The revenue brought in by its public bus business segment is still relatively small compared to its overall revenue. With its main rail business still under pressure, can positive changes to just its public bus business be enough to salvage the overall situation?

SMRT’s bus business

SMRT’s bus segment currently operates 97 routes in Singapore and has a fleet of more than 1,100 buses. In FY2013, the bus business had recorded revenues of S$224 million, which amounted to roughly 20% of the total revenue for SMRT. Unfortunately, due to the high operating costs within the bus business, it suffered an operating loss of S$30.8 million for the year.

In terms of revenue, SMRT’s rail business is almost three times larger with annual sales of S$608 million in FY2013. The rail business, with operating profit of S$64 million in FY2013, is also a whole lot more profitable than the bus segment.

How might the new business model for public buses change things for SMRT?

Even if we assume SMRT’s public bus business will turnaround almost immediately, its overall impact, though positive, will be small. That’s because buses only contributes 20% to SMRT’s overall revenue, as mentioned earlier.

Profits from SMRT’s rail operations have been declining rapidly as shown in the table below and there’s no sign of the decline slowing down anytime soon. The new business model for the public bus industry announced by the LTA hardly seems like a game changer for SMRT if the company is unable to resolve the challenges its facing in its rail business as well.

Financial year ended 31 March

Pre-tax operating profit from SMRT’s rail business

2010

S$129 million

2011

S$113 million

2012

S$91 million

2013

S$64 million

2014

S$3.4 million

Source: S&P Capital IQ

Foolish Takeaway

At SMRT’s current share price of S$1.465, the company’s selling for 36 times trailing earnings and 2.8 times its current book value. Those are lofty valuations that make it seem like market expectations might have run ahead of the business a little.

There have been discussions between SMRT and the LTA regarding the rail financing framework. The rail financing framework, first released in 2010, would see the LTA become an owner of operating assets for the rail industry in a similar way as it did for the public bus industry.

But just last week, Chanel News Asia had reported that the discussions for the rail framework “are more complex.” Judging from the run-up in price for SMRT, it seems that the market’s expecting the rail deal to be successful as well so that the company can turn itself around fully.

However, without any confirmation from the government on their plans for the rail industry in Singapore, the market’s high expectations could be a source of risk for investors if the story does not turn out as expected. And like I’ve mentioned earlier, a mere turnaround in SMRT’s bus business hardly seems sufficient to revive the entire company’s fortunes.

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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 doesn’t own shares in any companies mentioned.