7 Quick Things For Investors To Know About LTA’s Purchase Notice to SMRT Corporation Ltd

Changes are afoot for Singapore’s public transport companies.

Last Friday, SMRT Corporation Ltd (SGX: S53) announced that it had received a purchase notice from the Land Transport Authority (LTA). The notice was to transfer ownership of buses under the Bus Service Enhancement Program (BSEP) from SMRT to the LTA. This marks another milestone in the transition of the public bus industry to a government contracting model.

Winds of change

Here’re seven things to learn about the purchase notice:

  1. It includes the sale of 175 new buses from SMRT to LTA for an estimated sum of $66.3 million. The proposed transfer of ownership is expected to be on 31 May 2016.
  2. Under the new public 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 have been won by British transport operators Tower Transit and Go-Ahead Group.
  4. Nine of the 12 bus packages will remain with the current incumbents, SBS Transit Ltd (SGX: S61) and SMRT Corporation. This represents roughly 80% of the public bus fleet. Both companies will negotiate a new five year contract for the nine packages when their current Bus Service Operating License expires on 31 August 2016. For reference, SMRT Buses, a subsidiary of SMRT Corporation, was granted a 10-year Bus Service Operator’s Licence (BSOL) on 1 September 2006 by the Public Transport Council (PTC).
  5. SMRT Corporation had $861 million in debt as of 31 March 2015. Of this amount, around $68 million is related to the BSEP which bears an interest rate of 6% per annum. The LTA’s purchase notice may help to lower the debt load for SMRT Corporation.
  6. Less than 20% of SMRT Corporation’s top-line came from its bus segment for its financial year ending 31 March 2015 (FY2015). The new bus contracting model could lower the company’s revenue, as the bus fares will go to the Singapore government instead. That said, SBS Transit could be more profitable with an asset-light model in the new business model for Singapore’s public bus services.
  7. More than half of SMRT Corporation’s top-line came from its Rail segment in FY2015. Meanwhile, rental and advertising makes up over 12% of the fiscal year’s revenue and a whopping 84% of its segment operating results. At the moment, it is not clear (to me) whether SMRT Corporation will get to keep its advertising and rental income for its bus depots. As of 31 March 2015, SMRT Corporation listed three bus depots under its group properties.

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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.