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Why can't SBS raise money through issuing more shares?

 

~by: Sharon Ng~

Much has been said on why the S$1.1B injection into SBS Transit is wrong. Since SBS Transit operates 75% of the bus fleet in Singapore, I will take a quick look at the financials of SBS Transit.

According to the annual report available on the SBS Transit website, it can be seen that the group has a 3.42% increase in revenue, a 4.02% increase in operating profit (year-on-year 09/10), and a 3.35% increase in operating expenses . Its EPS has actually decrease a little by 0.56%, while the net asset value has increased by 9.72%. The total dividend per ordinary share has not increased, and the return on shareholders’ equity has actually decreased by 10%.

Taking the data on a 5-year period from 2006 to 2010, it has enjoyed a 14.61% increase in revenue, 13.51% increase in operating profit, 14.72% increase in operating expenses, a decrease of 12.62% decrease in shareholders’ equity, a decrease of 4.86% in EPS, and a decrease of 62.23 of total dividend per ordinary share.

This makes me wonder if shareholders should be angry with SBS Transit, and perhaps that’s why it cannot raise money through issuing more shares. I do not know the rating of SBS Transit, but I will doubt it has difficulty borrowing, since it is backed by Temasek Holdings.

Taking a deeper look at the Group Income Statement between 2009-2010, it has an increase of 1.27% in staff costs, 3.02% decrease in repairs and maintenance, and a 10.45% increase in fuel and electricity costs. Operating profit increased by 4.04%. As a percentage of operating expense, staff costs represent 44.62%, while fuel and electricity costs represent 20.43%. Repairs and maintenance represent 13.67%. Just like an airline, most of SBS Transit’s expenses come from labour and fuel costs.

Again, for the period 2009-2010, the Bus segment information reveals that revenue has increased very little by 0.55%, while the additions of vehicles, premises and equipment has decreased a whopping 43.88%. Segment assets has increased by 10.53%. According to the financial report, segment assets include all operating assets and consist of operating receivables, inventories, vehicles, premises and equipment, net of allowances and provisions. So if additions of vehicles (etc) have decreased, this means that this asset increase is in inventories and receivables. So why is SBS Transit hogging this much inventories and receivables? Does this make good financial sense?

Taking a look at the Group Income Statement between 2006 and 2010, one statistics that jumped out is the increase in depreciation expense, at 91.38%. Another interesting number to look at is the steep decrease in net income from investments, at 93.36%. The increase in revenue is 14.69%, while the increase in staff costs is 7.16%. Repairs and maintenance have increased by 19.91%, while fuel and electricity costs increased by 10.38%. The basic EPS has actually decreased by 4.81%.

Taking a look at the Bus segment information 2006 and 2010, segment assets has increased by a whopping 137.77%, while depreciation expense also increased at 92.35%. Addition of vehicles, premises and equipment increased by 13.23% and segment liabilities increased by 9.55%. As said earlier, segment assets include addition of vehicles (etc) among other things, but yet the steep increase in segment assets is not explained by the addition of vehicles (etc), but is possibly due to the increase in operating receivables and inventories.

This can be further seen on the Cash Flow Statement of 2010, where there is a steep increase in inventories from -3.7M to 1.45M. The Trade Payable for buses has also increased from -4.55M to -26.73M. Cash generated from operations has actually decreased about 55.9%. As we know, commuters pay by ezlink and cash, and this is actually a cash-based business where SBS Transit receives cash from its operating activities. In years 2007-2010, bus ridership has increased by 8.19%, however, this did not help in the cash flow situation.

Taking a closer look at the addition of vehicles(etc) and the amount of vehicles (etc), it can be seen that for the period 2007-2010, the Bus segment has added 113% of vehicles (etc) while ridership has increased by 8.19%. Of course, there are new buses to be added to the fleet due to buses being replaced. This addition of assets has also led to high depreciation costs.

According to the website, it operates about 3000 buses. Taking a very crude way to average, the cost per bus (including premise and equipment) is $178, 616. Of course, not all buses are new and cost the same, hence this is a crude number. Now if we take the number of buses to estimate the operating expenses for these 3000 buses, it will be about 218,720 per bus. Together, with a mix of buses of different age and types, it can be estimated that a bus costs about 178,616 on book, and costs about 218,720 to operate, which gives us $397,336 per bus.

Now with a $1.1B injection, how many buses (not new buses, but just the “average bus” on the SBS transit fleet) are we talking about? The answer is 2788.43 “average SBS buses”. Wow, that’s a lot of buses, given that SBS transit operates 3000 now.