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Where to Next for SBS Transit? – Part II

Welcome to the second part of the article on SBS Transit Ltd. (SGX: S61). In my previous article, I covered the sources of revenue for SBS Transit. In this second article, we look at the profit and balance sheet for the company.

A closer look at profits

From our previous article, we have observed that SBS Transit has grown its revenue by a compounded annual rate of 3.4% over the past five financial years. Now we take a look at the segment profits to see if the top line trickles down to the bottom line. Further more, we will look at the operating cash-flows and capital expenditure to see if the company has been able to generate free cash flow.

Can SBS Transit Grow its Dividends? - 2

Source: Company Earnings Presentation

From the segment profit point of view, the picture ain’t so pretty. Overall, SBS Transit has seen its segment profit fall by over 75% during the past five financial years. This comes despite the increase of revenue during the same duration. Both the Bus and Rail segments has been experiencing sharply declining profits, and has been hemorrhaging money for 2013 (the financial year lines up with the calendar year). On the flip side, the Rental and Advertisements segment has been the most profitable segments in 2013, and made up the bulk of the segment profits.

Can SBS Transit Grow its Dividends? - 2

Source: Company Earnings Presentation

The operating cash flow for SBS Transit was not much better. There was a steady decline over the past five years as well. Unfortunately, capital expenditure for the company has remained above operating cash flow for the entire duration under study. The high capital expenditure and declining operating cash flows meant that the company was free cash flow negative for each year.

Can SBS Transit Grow its Dividends? - 3

Source: Company Earnings Presentation

With negative free cash flow in each of the past five years, it might not be surprising to see that SBS Transit has really piled on debt from 2010 onwards. It has gone from being debt free in 2009 to $354 million in borrowings by the end of 2013.

Foolish summary

In view of the deterioration in the balance sheet and negative free cash flow, it might not be surprising to see the dividend for SBS Transit being cut from S$0.088 per share in 2009 to S$0.0215 per share in 2014. Foolish investors might want to look for signs of operating cash flow improvements with moderated capital expenditure spend before expecting too much from the company.

On a positive note, the nature of SBS Transit’s business (daily usage) provides a stable source of revenue. However, it is for the company to make the sales count, and turn a profit.

Moving forward, all eyes should also be on the new government bus contracting model which will kick off in 2016. According to the Ministry of Transport, contracts for 20% of the existing bus routes will be tendered out in the first phase. Each contract would last for five years, which can be extended for two years based on performance. Ultimately, there could be added competition for the bus routes, but with lower capital spend as well.

As of the closing price last Friday (28 November 2014) of $1.72, SBS Transit traded at a trailing earnings ratio of about 33.7, and has a dividend yield of around 1.25%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.