(10-12-2015, 11:22 AM)CityFarmer Wrote: [ -> ] (08-12-2015, 09:49 PM)CY09 Wrote: [ -> ]To the public in Singapore, profits from PTOs is "operations + rental + advertising profits"; the latter 2 makes up a lion's share of profits for the incumbents.
To many VB here, it seems the viewpoint of profitability is focused solely on the operation segment.
Both sides have their own viewpoint that are right; however the profits of operations+ retail component should not be viewed in isolation. Hence in the new model, LTA will have to see how much total profits should be apportioned to their operators. Using public fund to shoulder the less profitable bus operations+ giving an operating margin to operators while allowing the latter to pocket the non fare revenue, is not a proposition the public will like. Even I will prefer that all revenues goes to govt and then a margin be returned to operators should they provide good transportation service
The new bus contracting model, has indirectly taken a holistic approach to PTO profitability, right?
Each PTO will bid on basic of "desirable" cost-plus profit, after taken all consideration, including the supplementary income(s). With market competition, the service fee will be reduced, thus reduced the burden of public fund, isn't it?
(not vested)
The service fee has already been locked in for 2 out of 3 contracts. These contracts represent approximately 20% market share of the local bus industry.
Bulim: $556 million (or $111 million p.a) for 5 + 2 years.
Loyang: $497 million (or $100 million p.a) for 5 + 2 years.
Contract 3: ???
The service fee is not constant. It will be adjusted for changes in operating cost i.e. fuel cost and wage changes hence ensuring a sustainable operating margin to the PTOs throughout the contract. This also exclude the incentive fees (of up to 10%) if service quality targets are met. The remaining 80% of market share will be given to the incumbents till 2021. Competition will not matter for another 5 years.
Warning: Very Crude and Speculative Model
The goal is not to determine the profit of restructured SBS Transit bus segment but to show how based on few assumptions, this bus contracting model can improve the company's bottomline.
SBS Transit generated $25.8 million EBIT from the bus non-fare operation and -$13.5 million EBIT from the bus fare operations in FY 2014 with approximately 75% market share. The overall EBIT margin is merely 1.6%. The total operating cost of the entire bus segment works out to approximately $740 million p.a.
Go Ahead reports over 9% operating margin for its London Bus segment which runs in a similar model. Based on their annual report, 95% of the revenue is derived from the fixed fee income from TfL (Transport For London) while the remaining 5% is from performance fee and advertisement income. The press has long reported that we are modelling our bus contracting model after the ones used in London and in Perth. The margins in SG needs to sufficiently lucrative to entice foreign operators to set up business here. If the EBIT margins remains at < 2%, I highly doubt anyone will venture into tiny Singapore just to earn $2 million per contract. Assuming the segment operating margins are 7%, it implies that the two contract operating margin should be around $15 million. Once the third contract is up, we can verify the EBIT for 20% market share. Again, this assumes the contract value prices in the non-fare revenue (which isn't true). But since the non-fare revenue isn't substantial compared to bus operating revenue, I don't think it will make much difference to this very crude estimate.
Hence, if SBS gets 60% market share from LTA and it can earn 7% margin (big assumptions), it implies that SBS would earn $45-60 million EBIT from the bus segment alone. This excludes the train operations which sees DTL2 commencing operation later this year. This is the second twin engine of growth for SBS Transit as it is currently loss making due to start-up cost. Currently the NEL and DTL lines are already operating under the asset-light regime so there is minimal capex cost unlike what SMRT is experiencing. While the rail business for SBS is still loss making, it could improve once the DTL is fully operational.
This is a very crude modelling technique. We are completely ignoring the train segment here. There are a lot more parameters to alter in order to model SBS earnings. I came up with numerous possibilities. Even analysts have attempted to do so but they do it via ComfortDelgro perspective.
I suspect there will be a large improvement in SBS earnings. However, I don't think we will face a scenario of > 7% margin on service fee + non-fare income. Likely the blended margins will be around 7-10%. Again, this is simply my guess. One should explore various margins and see what data pops up.
Competition will intensify post-2021 with the incumbents 9 contracts up for tender. It is imperative that they maintain the service quality and exceed their targets to stand a good chance of retaining these contracts. Since the contracts are not based on price alone, the quality of service matters highly. Hence I don't foresee a substantial margin erosion in the decade to come. Or else, it would make far more sense to award the Bulim contract to SMRT at $93 million instead of Tower Transit at $111 million.
Naturally, this remains a fairly speculative investment. Unlike many investment with readily available financial data, this relies heavily on a prospective investor using models and parameters to determine a possible range of future earnings. Moreover, unlike Comfortdelgro, there is no diversification to protect an investor if things fail to turn out as planned.
I stress once again - this is a very crude and highly speculative estimate with a number of assumptions. It could (and very likely) be wrong. I await further details in the coming months from regulatory bodies and the Management. Till then, its just guesswork. Finding the the exact number is not quite the goal. The key is to derive a set of possible future earnings based on various assumptions and see if it fits with the underlying valuation.
Please point out errors in my thinking/logic or data.
**I edited the original post to reduce the complexities in the model I had created. Keep things light and simple**
(Vested)