SBUS hits Gear 3: the case of the mysterious BSEP loan!

Special Situations, Content Strategist, Smartkarma

Crispin Francis

Special Situations, Content Strategist

Smartkarma

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On the 21st May 2014, the Land Transport Authority of Singapore (LTA) announced a transition to a <a href="http://www.lta.gov.sg/apps/news/page.aspx?c=2&amp;id=28fca09a-bed6-48f4-99d4-18eeb8c496bd" target="_blank">Government Contracting Model</a>&nbsp;For the Public Bus Industry.&nbsp;Investors&nbsp;seem to likes this new model, as the share price of SBS Transit ("SBUS") has risen&nbsp;by 26% since the announcement. &nbsp;Subsequently, on the 8th of May 2015, it was <a href="http://www.lta.gov.sg/apps/news/page.aspx?c=2&amp;id=6bc7cedf-2390-4c4f-904c-de12115b1354" target="_blank">reported</a>&nbsp;that the LTA's first bus service contract was won by a foreigner. This means that the market share of the current incumbents would be reduced. However, the share price of both SMRT and SBUS reacted positively to this news. &nbsp;We were intrigued by the latest developments, so we took a look at the current financial position of SBUS and ran some analysis to forecast how a new SBUS would look once the reforms kick post&nbsp;their Bus Service Operating License expiry in&nbsp;August 2016.&nbsp;As per our analysis, the numbers strongly suggests that SBUS is still undervalued.Furthermore, there is a privatization possibility by its parent SGX-listed ComfortDelGro ("CD"). Even if this does not materialize, SBUS is still likely to rerate and pay out a special dividend once the Government buys over their operating assets which currently have a carry value (at 31 Dec 2014) of S$952m vs its current implied EV of S$1,086m (ie market is not&nbsp;assigning&nbsp;any value to the continuing operations).&nbsp;&nbsp;We would go long SBUS in view of the potential re-rate and special dividend, with an added possibility of a privatization offer by CD.

On the 21st May 2014, the Land Transport Authority of Singapore (LTA) announced a transition to a Government Contracting Model&nbsp;For the Public Bus Industry.&nbsp;Investors&nbsp;seem to likes this new model, as the share price of SBS Transit ("SBUS") has risen&nbsp;by 26% since the announcement. &nbsp;Subsequently, on the 8th of May 2015, it was reported&nbsp;that the LTA's first bus service contract was won by a foreigner. This means that the market share of the current incumbents would be reduced. However, the share price of both SMRT and SBUS reacted positively to this news. &nbsp;We were intrigued by the latest developments, so we took a look at the current financial position of SBUS and ran some analysis to forecast how a new SBUS would look once the reforms kick post&nbsp;their Bus Service Operating License expiry in&nbsp;August 2016.&nbsp;As per our analysis, the numbers strongly suggests that SBUS is still undervalued.Furthermore, there is a privatization possibility by its parent SGX-listed ComfortDelGro ("CD"). Even if this does not materialize, SBUS is still likely to rerate and pay out a special dividend once the Government buys over their operating assets which currently have a carry value (at 31 Dec 2014) of S$952m vs its current implied EV of S$1,086m (ie market is not&nbsp;assigning&nbsp;any value to the continuing operations).&nbsp;&nbsp;We would go long SBUS in view of the potential re-rate and special dividend, with an added possibility of a privatization offer by CD.

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