Sunday, September 5, 2010

Why I invest in SBS Transit

Everybody knows what SBS Transit does. It runs 75% of the buses in Singapore and the NE Line. It also manages the 17+ bus interchanges located throughout Singapore. It is one of those businesses perceived to go on and on but probably will grow very little and maybe shrink down a bit when the MRT coverage is more comprehensive. But it is a very stable business that will not be jolted in a severe recession. This is a stock that no analyst wants to cover because liquidity is low and it is so unexciting.

Before I invest, I made the following assessment:-
I calculated the total Cash from Operating Activities from 2002 to 2009. It is 918.5M.
The total capex from 2002 to 2009 is 573.2M. I noticed that in 2008 and 2009, capex was exceptionally high as SBS upgraded most of it fleet during the recession.It is not possible to do a meaningful assessment on a single period. A multi-year assessment is probably more appropriate.
The average FCF per year work out to be 43.2M.
I did not noticed any long term debt and cash and equivalent is about 14.8M
So the Enterprise value is 554M - 14.8M = 539.2M.

So, FCF / Enterprise Value work out to be 0.08. The company is generating 0.08 ct of cash per dollar of Enterprise Value. Assuming no major changes in operating environment, the company will be able to get back a dollar of cash in 12.5 years for a dollar of Enterprise Value.

But, I think there will be some upsides

1) With all the major capex done in 2008 and 2009, I believe the FCF moving forward will look better
2) There is the possibility that SBS will win another operating MRT line besides the NE Line due to its successful track record with NE Line and the desire to avoid a monopoly by the government
3) The resident population will most likely move up higher to around 6 to 6.5 million.

Hence, I vested at an average price of $1.73 a few months ago and had hence received two dividends totalling 8.8cts

Note: If a use Benjamin Graham's intrinsic value calculation, assuming only a 0.5% growth rate, it will be
intrinsic value (SBS) = 17.75 * (8.5 + 1) = 1.69. Pretty close to my purchase price, though

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