Now, on to the actual post.
The first part to this can be seen here:
Is it Worthwhile Investing in Public Transport Operators? (Part 1)
This is a continuation from the previous post and intended to give a better analysis of the shares instead of just through their P/E ratio and the factors affecting them. This will cover the other aspects such as the balance sheet and cash flow.
(Image source: https://twitter.com/sbs_transit and http://www.smrt.com.sg/Media/Press-Releases)
In the balance sheet, both companies have a long-term debt to equity ratio of below 1, 0.92 for SBS and 0.95 for SMRT. I think this is quite acceptable due to the capital intensive nature of their business. However, this would definitely eat into the special dividend that the shareholders may get when the government buys back the assets from these two public transport operators as they would have to pay off the debt on those assets first. While SMRT has sufficient cash to pay off its current borrowings and a fair bit extra, SBS has almost $5m in cash against slightly over $200m in current borrowings, so SBS has a liquidity risk (risk of inability to meet short term demands). In the balance sheet, SMRT would seem safe and may even be able to put some of its money into expansion while I'm not really for SBS in this regard due to their small cash position relative to their short-term financial obligations.
The two companies also have to spend a lot of money on purchasing PP&E. In the last two years, SMRT spent more than 7 times its profit after tax on PP&E while that number is almost 15 for SBS. Without some form of government funding, it sounds very hard for the companies to actually make a profit on their businesses. Once again, this government funding may be taken into account when the government buys the assets from the two companies. Reliance on government funding would also be detrimental if there is a change in government policy.
There seem to be quite a few risk factors for the two public transport operators, with the liquidity risk that SBS faces, the large amount of PP&E needed to sustain the business (which necessitates government funding), the risk of fines during disruptions of service. If any of the risk factors come to bear on the companies, their returns would take a potentially large hit, but even if none of them do come true, the returns that they offer are already quite low. Investing in one of public transport operators doesn't seem very good either way.
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