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SBS Transit Ltd’s Full Transition to the New Rail Financing Framework: What Investors Need to Know

SBS Transit Ltd (SGX: S61) provides bus and rail services to the Singapore public. A few days after the company announced its 2017 financial results, it said that it would transition entirely to the New Rail Financing Framework (NRFF).

Here are 10 key things from the announcement that investors would be interested to know:

1. SBS Transit will operate the North East Line (NEL) and the Sengkang and Punggol Light Rapid Transit (SPLRT) under the NRFF from 1 April 2018. The Downtown Line is already under the new framework.

2. Under the NRFF, the Land Transport Authority (LTA) will buy over the existing rail assets from SBS Transit. It will then own and pay for the assets, including additions, renewals and replacements.

3. With the change, all SBS Transit’s rail assets will be under the NRFF.

4. The NRFF is an asset-light model as the LTA will take care of capital investments for the operating assets.

5. SBS Transit will pay an annual licence fee to the LTA over the licence period for the right to operate, maintain and derive revenue from the rail systems. The licence period for the NEL and SPLRT is 15 years from 1 April 2018, with a possibility to extend for five more years.

6. The structure under the NRFF offers revenue risk mitigation and profit sharing based on specific percentages.

7. The LTA will acquire SBS Transit’s rail operating assets based on the net book value (NAV) as at 31 March 2018, which is estimated to be around S$28.8 million.

8. The authority will pay 60% of the total transaction amount on April 1, and the rest over the next two years. SBS Transit wants to use the proceeds to pare down debt.

9. As at 31 December 2017, the transport operator had total borrowings of S$181 million and S$804 million in total operating assets (defined as “vehicles, premises and equipment” under the balance sheet).

10. SBS Transit’s chief executive, Gan Juay Kiat, said:

“The New Rail Financing Framework is a more sustainable model for us in the long term. It enables us to focus on the operations and maintenance of the rail systems so that we can improve our service delivery further. It relieves us of the cost of asset renewal and upgrade, and of procuring additional operating assets when ridership demand increases, in order to meet service level and reliability standards set by the LTA.”

The move to the NRFF is in addition to the bus assets being under the Bus Contracting Model (BCM) since September 2016. The NRFF and BCM could potentially transform SBS Transit into a “dividend machine” as the firm no longer needs to fork out money to replace or buy new trains and buses.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of SBS Transit Ltd. Motley Fool Singapore contributor Sudhan P owns shares in SBS Transit Ltd.