There seems to be no safe haven in this current economic landscape with runaway inflation and plunging stock prices. Gold could be one asset class to look at and digital gold- Bitcoin- seems more attuned as a speculative venture that mirrors the drop with the once-mighty growth stocks.
Despite the challenging environment, we feel that these 2 stocks should hold well and even be a beneficiary of the current woes. All of us know the prices of oil and the prices of cars in Singapore’s case are shooting up. The certificate of entitlement for a car is reaching almost 72k USD in Singapore and that is even before the cost of the car is factored in. In this double whammy scenario, many could be turning to public transport.
In a discussion with a friend, he suggested for those who are used to a car, would rather dine out less so as to enjoy the convenience of having a car. So we have different sides to the notion of the shift towards public transport. If prices remain sky-high, we believe our thesis could be the more likely scenario.
Moreover, the prices of cabs have also been rising in tandem with inflation. Nowadays, it seems hard to flag a cab and they are usually available only through the different booking platforms. A normal trip could easily top $20 nowadays where it could be in the mid-teens previously.
What are the 2 Stocks?
So today we are covering 2 stocks namely, Transport International and SBS Transit. They are looking attractive given the tailwinds towards their business in this current inflationary situation. It is not only recession-proof but an essential industry.
Just a brief overview of their business, both of them are in the transportation business mainly as a provider of public bus services. Transport International is also a property play (Investment Properties make up 35% of the book value- Leading Hong Kong Property Developer, Sun Hung Kai, has a 33% stake in TIH) whereas SBS Transit has the train and commercial segment (Advertisement and Rental of Shops in the Train Stations) from their managing of the North East and Downtown lines in the Singapore MRT network that have 6 lines.
Source: TIH Annual Report 2021- TIH’s Property Holdings
Is Recovery on Track to Pre-Covid Days?
Source: Transport Department of Hong Kong
Looking at the data from both the Hong Kong and Singapore public transport ridership, things are moving progressively back to normalcy. In Singapore, we are almost back to the status quo with no restrictions on office physical attendance and the reopening of the nightlife already in full swing. Hong Kong is gradually following in the footsteps of Singapore.
So we would conclude that the recovery of the transport sector is on the path to pre covid days.
Source: Land Transport Authority Singapore
But for our investing thesis to be viable, there should be above-average growth in ridership that will surpass the peak in 2019. From the Singapore data, the average growth rate of ridership for buses and MRT from 2005 to 2019 would be 3% and 6.5% respectively. With the shift to public transport phenomenon, we would expect a growth that would surpass the norm-ie: above 3% for buses and 6.5% for trains.
Financial Metrics
| Stock/ Price | Price to Earnings | Price to Book | Debt to Equity | Dividend Yield | Return on Investment | Current Ratio | Price to Free Cash Flow | Market Capitalization |
| Transport Int/ $12.6 HKD | 24 | 0.43 | 23% | 3.93% | 1.47% | 1 | Negative Free Cash Flow | 5.92 billion HKD |
| SBS Transit/ $2.88 SGD | 17 | 1.49 | 15% | 4.2% | 6.8% | 1.46 | 5.87 | 890 million SGD |
Source: Reuters and MooMoo
With a glance at the financial ratios, the safer and fundamentally stronger stock would be SBS Transit. They score well in all metrics relatively to TIH except for the price to book ratio.
Both give decent dividends and could compensate shareholders for the opportunity cost of their funds parked in this investment even if the price goes nowhere.
Valuation wise, it is not exactly cheap with PE above 15 for both companies. We do have to factor in the pandemic outlier effect that would have drastically affected the earnings though they do receive handouts from the government to tide through during this period. So once things go back to normalcy, the earnings recovery could be something to look forward to.
TIH does provide a greater margin of safety as they are trading at half of their book value which is backed by physical properties. Playing the devil’s advocate, given the Hong Kong situation, there is a possibility of Hong Kong losing its prime financial centre status that could see TIH’s properties being written down.
To play the resurgence of public transport theme, SBS Transit seems the better candidate based on financial metrics.
Chartist Angle
Source: MooMoo- SBS Transit Chart
Source: MooMoo- TIH Chart
From the analysis of the charts, SBS Transit seems to have a better structure than TIH as SBS Transit is in a consolidation mode.
On the other hand, TIH might not have bottomed out yet and any downside could see the next target at the 9.80 level. If there is a bullish surge, it could see resistance at $16.
For SBS Transit, the upside would be at $3.4-$3.6 followed by $4. The downside would be at $2.5.
Summing Up
With the recovery of Covid and tailwinds- higher cost of private transport and surge in oil prices- for the public transport sector, we have shortlisted Transport International and SBS Transit as 2 potential stocks we could look into for the recovery of the sector.
The public ridership has been on a steady recovery path towards the pre covid days based on the data from the transport authorities. If our thesis of a sustainable shift to public transport crystalizes, the growth would likely be more than the historical norm that will provide catalysts for future earnings growth for the 2 stocks we have highlighted.
On the whole, we feel SBS Transit would be a better candidate to ride this theme based on our analysis of their financial metrics and charts.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
