Is SBS Transit Stock a Good Buy Now?

Business Background

SBS Transit is in the transportation sector.

Started in operation in 2003, it is a major a transport focus company operating in Singapore.

Business includes:

• Bus Operation
• Rail Operation

Bus Operation

SBS Transit serves 16 of the total 26 bus interchanges and more than 3,000 bus stops.

Rail Operation

Operates in Light Rail Operations (LRT):

• Sengkang
• Punggol

Operates Mass Rapid Transit (MRT) system:

• North East Line (NEL)

DEBT TO EQUITY RATIO

Check for: Less than 0.5 D/E Ratio

Looking at the latest annual report for Year 2020.

SBS Transit have a D/E ratio of 0.164.

This is significantly lower than 0.5.

A lower debt-to-equity ratio indicates the company is not over-leverage and using less debt or, “borrowed money” to finance the company’s operations.

Lower debt, means lower risk of the company defaulting. This is a good sign when we are looking for a low risk investment.

My Opinion: Pass

Dividend Yield

Check for: More than 2.5% dividend yield

For Year 2020, SBS Bus pay a dividend of 0.06 which translate to a dividend yield of 2.00%.

This is slightly lower than my target of 2.5%.

But as 2020 and 2021 are the year of the pandemic. It is understandable that the company may want to keep more cash in case of need.

Although it is lower than the risk free rate (CPF OA Account) of 2.5%. I will probably give it a verdict of partially fail instead of fail.

My Opinion: Partially Fail

Dividend Payout Ratio

Check for: Less than 80% dividend payout ratio

At the time of writing, a quick check online shows that the dividend payout ratio for SBS Transit is just 23.30% which is far lower than my threshold of 80%.

With a low payout ratio, this means there is a huge upside potential for increasing the dividend in the future.

I personally don’t think the payout ratio will really change that much for the next 5 years, as the government just recently announced that they are pushing for more environmental friendly vehicles.

This means, most of the undistributed cash will be reinvested into the business to upgrade the buses.

My Opinion: Pass

EPS Growth Rate

Check for: More than 10% EPS Growth

A growing Earning Per Share will means that the company is taking care of the shareholders and are making money for us.

A constant growing EPS will be the perfect scenario of a perfect company.

Quick check on the 2020 annual report.

The EPS 5 year growth rate is a whopping 36.186%!

This is far higher than my threshold of 10%

My Opinion: Pass

High Return Of Equity (ROE)

Check for: More than 10% ROE

ROE is one of the most important ratio used by Warren Buffett.

Return of Equity is a profitability ratio that measures the ability of the company to generate income from shareholder’s money (equity). In other words, a higher ROE will mean a higher return for each dollar the shareholder invested in the company.

At the time of writing, the ROE of SBS transit have an ROE of 14.18%.

This is quite an achievement for a transport company that brace through the pandemic of Covid 19.

My Opinion: Pass

PRICE-TO-BOOK RATIO

Check for: P/B Ratio of less than 1.8

SBS Transit is a blue chip company with is traded commonly by moms and pops. Meaning, it will be almost impossible for this company to be traded below it’s book value.

At the time of writing, the current P/B ratio of SBS Transit is 1.67.

Which means, it is trading at a 67% premium to its book value.

My Opinion: Partial Pass

MOAT

Check for: Not just having a MOAT, but a great MOAT

SBS Transit is a transport service company with a business that is simple to understand.

Serving 16 of 26 total interchange island wide, SBS transit is one of the largest bus operator in Singapore.

Operating both MRT and LRT in the North-East of Singapore, SBS Transit is pretty much the only transport operator operating in the North East of Singapore

According to Phil’s book Rule#1 investing, SBS Transit have a strong Toll MOAT. As this company have an exclusive control of the marketplace.

My Opinion: Pass