Singapore Budget 2012 and VICOM

Yesterday, we have discussed about how SBS Transit is going to be negatively impacted by the implementation of the Budget for the new fiscal year. VICOM, however, stands to gain from what might be a loss to SBS.

Under the Bus Services Enhancement Fund, 800 buses will be added by 2016 of which 550 will be funded from the government. Now, we can understand why it took nearly 20 years for the PTOs to add 800 buses in the past. With more buses entail more inspection revenues for VICOM, so we shall see how much of a revenue will be added.

As public buses, they have to be inspected every 6 months paying $68 per inspection. Being diesel operated, they will also have to undergo CDST for $26. This gives us a total of $188 per bus added per year. 800 buses = $150400 annually. While this might represent a very small sum given VICOM's $25m profit, it is a form of recurring income that they will enjoy.

While the bus might be a small bonus rewarded to VICOM, what's more important is the continued change in attitude of the government towards diesel vehicle, that will signify long-term income growth for VICOM.

http://sgyounginvestor.blogspot.com/2012/01/vicom-part-2b-market-share-of-vehicle.html

In the above post, I have discussed about how the government has been slashing taxes for diesel car and how diesel car population has been growing. Here's the latest figure

Before 2009 - <20

2009 - 43

2010 - 138

2011 - 346

31/01/2012 - 374

Under the latest policy change announced, the annual Special Diesel Tax will be cut by 68% to around $320 - $500, which make it on par with petrol car driver whose petrol pump prices has been incorporated a duty of 41-44 cents per litre of fuel. As quoted from The Straits Times:

"Singapore will adopt the Euro V standard for diesel vehicles in 2014, and the slashing of the Special Diesel Tax is meant to encourage an earlier adoption of newer and cleaner diesel technologies, the minister explained."

This confirms my speculation that diesel vehicle will continue to grow until it accounts for a significant proportion of the vehicle population. It will definitely not be surprising if diesel vehicle population hit 1000 by end of the year given its growth rate, as diesel is a much more cost-effective and efficient fuel than petrol. All this will imply an extra $17 in inspection revenue for every diesel vehicle in the long term.

And with this, it shall lead to our Vehicle Emission Testing Laboratory, the one and only in the whole of SE Asia region and one of the world's few to be able to test for Euro V standard. As mentioned above, the special tax only applies to Euro V compliant diesel car and not to any of the diesel car out there. With the latest policy announced, our dear parallel importers will start to import more Euro V compliant diesel car models which has to be certified under the Mandatory Fuel Economy Labelling Scheme which only VETL can support. The price for each inspection will be 2-4k per model.

As such, the government has definitely handed a pretty nice Ang Pow to VICOM and I shall thank you on their behalf :)

Feel free to share which other company do you think has been affected by the latest budget

(Vested)

Singapore Budget 2012 and SBS

Minister for Finance Tharman Shanmugaratnam revealed the Singapore Budget 2012 yesterday with the main aim of building an inclusive society, helping the aged, the poor and the disabled. 3700 hospital beds will be added over the next 8 years and proportion of foreign workers allowed to be hired will be reduced in a bid to gear up the productivity of firm. Among them all, the government announces a $1.1 billion funding for the Bus Services Enhancement Fund, where total bus capacity will be increased by 800 from the current 4000 fleet operated by SMRT and SBS.

According to the Budget, the government will provide funding for 550 buses while public bus operators will add another 250 buses on their own. The sum of $1.1b will be used to cover the cost of purchase of 550 buses as well as their running costs for the next 10 years. Such a huge sum seemed to be a big bonus for the Public Transport Operator (PTO), funding the provision of extra capacity. However, on a closer look, such scheme might turn out to be a big bane for the PTO.

Since SBS has a 75% market share in terms of bus fleet, we shall examine how they are going to be affected by this funding. I will be using the Annual Report FY10 of SBS as reference for the figures. Given that bus ridership is not likely to increase by 20% because of this extra capacity, we can conclude that if the funding is not able to cover the running cost, SBS is going to have its profit margin lowered.

The funded 550 buses

As the cost of purchasing buses is being sponsored, we shall check if the remaining fund will be able to meet the operating cost for the next 10 years. Last year, SBS ordered a total of 600 buses for $268 million. Therefore, of the $1.1 billion, around 250 million will be used to buy the buses, giving us a remaining sum of $850 million to cover the running cost of 550 buses for the next 10 years.

With a 75% market share, it is likely that SBS will get around $650 million to fund the running cost of approximately 425 buses for 10 years, or $65 million per year.

From the annual report,

SBS's bus segment has an EBIT of $15 million on Revenue of $549 million, while depreciation expense is $45 million. Operating cost of 3000 buses (SBS's fleet size) work out to be 549-15-45= $490 million.

Thus operating cost of 425 buses in a year work out to be 425/3000*490m = $69 million, which is $4 million more than what the government funds. This figure will be rather accurate given that most of the expenses in running a bus are variable costs like wages, fuel expenses, repair and maintenance.

Even if we will to say that my figure is inaccurate, there will still be a depreciation expense on the income statement though this will not affect its cashflow. Given that buses are depreciated over 17 years on a straight-line method, this will work out to be an extra $10 million in depreciation expense.

The non-funded 250 buses

Similarly, using 75%, it is likely that SBS will have to pay for around 185 buses on their own. The cost of purchase will work out to be $82 million

Operating expenses will be 185/ 3000 * 490m = $30 million

Depreciation expenses will be another $ 4.9 million

Total Additional Expenses incurred from the 800 buses

Funded - $4 million in operating expenses and $10 million in depreciation expense

Non-Funded - $30 million in operating expenses and $4.9 million in depreciation expense and a cash outflow of $82 million

Total - $49 million of expenses in income statement each year and a one-time sum of $82 million

To be more conservative since my figures may not be accurate, I shall cut the sum by 50% to $25 million

Against an EBIT of $15 million, SBS is still going to face a loss of $10 million from its bus segment. To counter such a loss, SBS will then have to increase their bus revenue by at least $200 million a year using a EBIT margin of 5%, which means it will have to increase its revenue by 40%.

I believe that SBS will rather that government funds its MRT which has much lower operating cost but a higher fixed cost. SBS is going to suffer rather badly in the years to come even with the government funding. After the 10 years funding period, SBS will then have to fund an additional operating costs of 425 buses.