LTA’s Letter of Intent with SBS Transit Ltd: What Investors Should Know

Changes are coming for Singapore’s public transport companies.

Last week, SBS Transit Ltd (SGX: S61), which is three-quarters owned by ComfortDelgro Corporation Ltd (SGX: C52), signed a letter of intent (LOI) with the Land Transport Authority (LTA) for the sale of new buses and novation of existing procurement contracts (essentially, the transfer of the contracting entity) from SBS Transit to the LTA.

The LOI marks a milestone for the public bus industry in its transition to a government contracting model.

Changes are afoot

Here are several points to note about the LOI, the new contracting model, as well as how they might impact SBS Transit:

  1. The LOI includes the sale of 50 new buses to LTA for $23 million and the transfer of contracts worth around $164 million for 346 buses that are scheduled for delivery in 2016 and 2017.
  2. Under the new bus industry model, the Singapore government will own bus infrastructure such as depots, buses, and fleet management systems. Bus operators will be contracted and paid to operate the bus services while the Singapore government retains the fare revenue.
  3. To facilitate this transition, all existing bus routes have been bundled into 12 bus packages and will be progressively tendered out. The first two packages were won by British transport operators Tower Transit and Go-Ahead Group.
  4. SBS Transit will lose some of the routes that it is currently serving. The first tender package of 26 bus routes included 17 routes which SBS Transit serves. This will be run by Tower Transit starting May 2016.
  5. Nine of the 12 bus packages will remain with the current incumbents, SBS Transit and SMRT Corporation Ltd (SGX: S53). This represents 80% of the public bus fleet. Both SBS Transit and SMRT Corporation will negotiate a five year contract for the nine packages when their current Bus Service Operating License expires on 31 August 2016. After the negotiated five-year contracts expire, the nine packages will be gradually tendered out.
  6. SBS Transit had $482.5 million in debt as of 31 December 2014. Of this amount, $140.5 million is related to the Bus Service Enhancement Program (BSEP) and which bears an interest rate of 6% per annum. The BSEP provides government-funded buses. The LOI may help lower the debt load for SBS Transit.
  7. More than 79% of SBS Transit’s top-line came from its bus segment in 2014. The new bus contracting model may lower its revenue, as the bus fares will go to the Singapore government instead. That said, SBS Transit will presumably be more profitable as it transitions to an asset-light model. The bus segment also includes lucrative advertising and rental income and it is not clear to me at the moment whether SBS Transit will get to keep those in the future.
  8. The remaining 21% of SBS Transit’s revenue comes from its rail segment. This segment may grow in 2016 due to the opening of the new Downtown Line 2.

To learn more about Foolish investing and to keep up to date on the latest financial and stock market news, sign up for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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.