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New Bus Contractual Model Boost Investor Confidence In SMRT
Tradeable, Tradeable Ideas | 27 May 2014
By: Lim Si Jie
Articles (169) Profile
  1. SMRT’s profitability was heavily influenced by the old BSOL as it requires SMRT to invest in their own assets and infrastructure.
  2. The new LTA model allows SMRT to reduce operating cost and cut away depreciation expenses.
  3. An asset-light SMRT gives SMRT the option to invest and divert their funds into viable business ventures and possibly overseas acquisitions.

Lack Of Profitability Despite Increasing Commuters Demand

Under the old Bus Service Operating Licences (BSOL), which will be expiring on 31 August 2016, licenses are granted to selected operators to provide public bus services in Singapore. All investments made for assets (i.e. the busses and infrastructures) are required to be borne by the operators.

This leads to a major problem in the public bus sector. As the population in Singapore increases, SMRT is seeing a higher demand for more bus services.

However, given the lack of profitability amongst the two major bus service providers, SMRT and SBS Transit, both companies aren’t financially justified to expand their routes as well as increase the frequency of their bus services to provide better service to commuters.

Although there is an always increasing demand for SMRT’s services, SMRT is unable to position its pricing based on demand and supply factors. Instead, its prices need to be fixed at an affordable level despite having a duopoly in Singapore’s transport network. Prices are set at a certain range by the regulators.

The New LTA Model Proposed

The Government plans to nationalise bus operating assets and infrastructure, and contract bus services out via tenders. Under the new proposed model, the government will own all bus infrastructure and assets. SMRT’s bus assets are estimated at $250 million.

The LTA will grant the rights to operate certain bus routes through an open tendering process which commences in the second half of this year.

Bus operators will receive a service fee for operating the routes while the bus fares will be retained by the LTA. SMRT and SBS Transit will be given the contract to run nine packages out of a total of 12 bus service packages planned for bidding.

Each package consist of 30 to 500 buses. The LTA will initially tender only three packages consisting of 20% of existing buses

The LTA intends to sign on both operators to continue offering their services for the next five years based on the new contracting model once the BSOL expires.

Source: CNA
No More Buses Is Good News For SMRT

Bus repair and maintenance costs make up a fifth of SMRT’s operating costs. While being regulated to peg their ticket prices to a specific range and having to cope with the low profitability, SMRT still has to fork out operating expenses out of their own pocket.

The good news for SMRT is that new proposed model would allow SMRT to cut away operating and depreciation expenses and continue to receive revenue from the regulators regardless whether the routes they operate are profitable.

This bus contracting model represents a more sustainable option, given that SMRT and SBS are currently making operating losses of more than $40 million a year. Furthermore, an asset-light approach would help SMRT divert extra funds into other business ventures, such as overseas acquisitions.

SMRT Management

SMRT Corporation, will be engaging Zycus, a leading source-to-pay and procurement performance suite provider, to adopt its Spend Analysis solution.

This will help SMRT to attain a unified view of their spend data that would support their enterprise level strategic sourcing and spend management activities.

This is part of SMRT’s efforts to make sense of the large amount of data that they are processing every day. In an era where data processing is given so much emphasis to better understand consumers.

I feel that SMRT is taking the first step in the right direction. However, the yield of such an expensive investment is still doubtful as it will still depend on how the SMRT management is going to make use of the data that is analyzed.

#Bullish In The Long Term

I am thus bullish about SMRT’s prospects in the long run. However, there still remains a slight lingering concern at the back of my mind, i.e. how much will SMRT be paid to run their package and what market share is SMRT able to capture out of the nine packages to be split between SMRT and SBS Transit.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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