Investors eye school transport service
Student bus transportation services have emerged as a fertile investment ground
Investors around the globe are constantly searching for investment opportunities to deploy their funds and secure significant returns with minimal risk. Over the past few years, the GCC region and specifically the UAE, has witnessed a major investment inflow into two promising sectors healthcare and education.
Yet, as valuations skyrocketed in that now crowded space, opportunities lied in overlooked sectors like logistics and specifically specialised transportation. Within specialised transportation, student bus transportation services emerged as a fertile investment ground for industry players, experts say.
"We have recognised the lucrative investment merits of the student bus transportation segment early on, and were able to gain a first-mover advantage," said Shailesh Dash, chairman of Gulf Pinnacle Logistics.
Gulf Pinnacle Logistics owns a student bus transportation company Gulf Pinnacle Transport (GPT), which operates in more than 14 schools and transports more than 6,800 students each day via its 275-bus fleet.
"We are certain that the positive momentum and rapid growth witnessed in GPT will transform the company from a humble investment into a flagship and sizable portion in our portfolio" Dash added.
The student bus transportation business benefits from five major investment merits. Firstly, a steady and predictable stream of cashflows from day one as the school signs three to five-year contracts with student bus transportation providers. These multi-year contracts serve as a competitive advantage for transportation providers deterring competition.
The second major benefit is the security and visibility providers get on the potential revenue streams arising from a transportation contract which is executed prior to embarking on any capital investment such as the purchase or upgrade of buses.
Thirdly, the stickiness of the transporter's revenue, i.e. the quality and strength of its revenue base is another overlooked benefit. Parents are not likely to regularly switch schools of their children as such a move might negatively affect the child's quality of education and his social circle. Hence, parents' high switch costs ensure a recurring revenue for transport providers.
Fourthly, as parents pay their children's transportation fees prior to the beginning of the semester, transport providers benefit from 2-3 months of negative working capital, i.e. the money is received prior to the service being provided which enhances the financial strength of the student bus transportation company.
Finally, investors usually seek to enhance their return using leverage. However, GCC banks are very reluctant to provide significant amount of leverage for investment purposes with the exception of the real estate sector. For example, a significant bank financing ranges between 30-50 per cent of acquisition price. In the student transportation bus business, banks are willing to provide an 80 per cent loan to value on vehicles, resulting in substantially improved returns on equity investments.
The attractiveness of such investment merits surely is coupled with significant operational challenges. Being able to manage bus drivers, optimize routes, secure transportation contracts and ensure children safety on-and-off the bus is by no means an easy task.
"Schools want to outsource bus transportation because of the mounting challenges that the industry presents on the safety, quality and overall operation fronts," said Ganesh Sivaraman, GPT's senior vice-president.
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