26
May
2015
VICOM Analysis
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0 Comments
Vicom was mentioned a few times by the investors and thus, I decided to research on this stock. The following extracts are pretty insightful.
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Business: Co is a leading provider in technical testing and inspection svcs.
Insight: Co's AGM will be held on 21 Apr-15 at ComfortDelGr... Read More
According to an AmFraser report, about one-third of VICOM’s revenue comes from its vehicle inspection segment, which relies on the number of vehicles flowing through the company’s vehicle inspection centres.
Realistically, there will be a finite limit on the number of cars on Singapore’s roads. From the graph below, we can see that the rate of growth in the number of motor vehicles in Singapore is slowing over time – that may eventually affect the revenue growth of VICOM’s vehicle inspection business segment.
Sure, there is the possibility of charging higher inspection prices but still, one tailwind (more vehicles) for VICOM may be more subdued in the future.
Lower Margins
The non-vehicle inspection segment at VICOM makes up the other two-thirds of the company’s revenue, according to AmFraser. Although sales for this segment may continue to grow, it may come at the expense of lower profitability.
Unlike its vehicle inspection segment’s market-leading position, the non-vehicle inspection segment faces more competition. This could translate to lower operating profits.
We can see this from the last-known official business segment breakdown provided by VICOM in 2011.
As such, it is possible that the overall net income margin for VICOM may decrease in the future if the non-vehicle inspection segment makes up a larger piece of the overall revenue pie.
High Dividend Payout, Slower Dividend Growth In The Future
Shareholders of VICOM have enjoyed years of increasing dividends. However, we should note that the dividend pay-out ratio (ratio of dividend against net income) has been creeping up over time. This is seen in the chart below.
What this means is that the growth in dividends may be less steep than before.
Historically High PE
Despite revenue growth slowing over the past few years (from 8 percent in 2011 to just 3 percent in 2014), shares of VICOM have been trading at an elevated trailing price-to-earnings (PE) ratio. As of 22 March 2015, the trailing PE ratio for VICOM was 19.2. As you can see in the chart below, that is substantially higher compared to the firm’s historical trading range.
This presents a valuation risk in the sense that VICOM’s shares could fall if its underlying business growth was to stall.
The possible downtrend in Vicom could probably be testament to the idiom “What goes up must come down”, unless Vicom can find a way to navigate itself out of a potential downturn in its business cycle.
But given that Vicom has proved itself as a relatively resilient business in the past years, I would expect the management to have other plans that could possibly diversify its services that may help tide it through the downtrend.
There is still time for precautions as the projected downtrend seems to be more prominent only towards the end of 2015.
At the same time, if the government were to increase the number of new vehicles on the roads in the coming few years, it would be a positive sign for Vicom’s business somewhere further down the road.
VICOM – The Bull Argument
CORPORATE DIGEST | 27 MARCH 2015
The subsidiary of transport conglomerate, ComfortDelGro Corporation, VICOM, would most likely be a familiar name for vehicle owners as the company owns and operates seven out of nine approved vehicle inspection centres in Singapore.
Under the regulations by the Land Transport Authority (LTA) of Singapore, it is a requirement to send vehicles of age three years old and above (from the date of registration) for at least a biennial inspection at one of the nine approved inspection centres.
VICOM runs the vehicle inspection centres under the names of VICOM and JIC Inspection Services (78 percent owned) in Singapore.
Here, I will put forth three pointers, entailing why VICOM is and will remain as a bullish case.
Revenue Visibility
VICOM derives majority of its revenue from the provision of inspection and testing services for vehicles and non-vehicles. This segment represented 96.4 percent of the revenue recognised in FY13.
Apart from the non-vehicle related segment, the company’s vehicle segment provides a large degree of revenue visibility, given that its revenue stream is approximately with some adjustments, a function of the number of cars in Singapore that are aged three years and above.
Adjustments have to be made considering that they own seven out of nine vehicle inspection centres and not all in Singapore.
Revenue of VICOM between FY10 and FY14
VICOM’s revenue stability can be reflected in its revenue trajectory which has grown at a compounded annual growth rate (CAGR) of 6.5 percent between the five-year period of FY10 and FY14.
Some may argue that with the lower rate of new car registrations that is mainly due to the higher cost of ownership, the company’s revenue growth may be hampered.
However, the higher premiums would at the same time lengthen the duration of car ownership, as consumers turn to used cars that are generally less expensive compared to new ones.
As cars are only required to be sent for inspections after the third year, a lower cost of ownership could induce more purchases of new cars by consumers as opposed to old ones and in this case, resulting in a lower age cycle of cars on the road, thereby having a negative impact on the company’s revenue.
Some may wonder that the dependence on used cars may eventually come to a halt, since old cars would eventually be retired, as well as new cars have to be registered in order to continue the transition of these cars beyond the three-year mark before revenue could arrive for VICOM.
Indeed, this could be true if the country’s vehicle population is declining, however, statistics published by the LTA paint a different picture.
Singapore’s vehicle population which includes other types of vehicles such as buses, taxis, motorcycles and others, currently stands at 974,170 as at 2013, returning a 1.3 percent CAGR for a five-year period between 2009 and 2013.
The sustained growth in the country’s vehicle fleet will be able to drive a consistent revenue stream for VICOM.
Besides, considering that it has a dominating position of a 77.8 percent market share according to the number of vehicle inspection centres VICOM owns, the company is able to command a significant level of pricing power even in the event of a decline in vehicle inspection volumes.
Rock-Solid Balance Sheet
More often than not, a strong and stable business model has to be accompanied with a balance sheet of a matching strength in order for a business to be sustainable in the long run.
As at FY14, VICOM’s balance sheet recorded a total asset position of $169.3 million, out of which, more than 50 percent of the amount consists of cash and cash equivalents.
A large position of cash relative to its total asset position awards multiple gateways of opportunities for a company, be it as a war chest for to make acquisitions for growth, a buffer in case of an urgent need for funds or simply to return them back to shareholders through share re-purchases or special dividend pay outs.
Furthermore, the company does not have any debt in the form of bank loans or corporate bonds on its balance sheet.
This means that not only would there be no financial burden imposed in the form of interest payments on the company, but importantly the constant woes of an interest rate hike would have almost no impact on VICOM.
Amounting to $29.4 million, its liabilities are mainly made up of trade payables which are a part of the company’s working capital or amounts that are incurred from its business operations.
Considering the company’s current ratio (current assets divided by current liabilities) of 3.8, the high multiple provides a clear indication that the company is able to soundly meet its short-term financial obligations.
All in all, these factors above formed the pillars of a rock-solid balance sheet for VICOM.
Tapping Into The Growing Vehicle Population
VICOM’s vehicle inspection and testing business segment presents a case of a strong and stable business model where it owns seven out of nine vehicle inspection centres in Singapore. Furthermore, as the LTA requires vehicles to be sent in for regular inspections as well as a growing vehicle population in Singapore, this creates both a growing and recurring stream of revenue for the company.
Accompanied with a rock-solid balance sheet where majority of the company’s assets are piled with cash, there is of no surprise wonder why VICOM shareholders could be smiling despite being caught in a traffic jam.
Vicom Limited (SGX: V01) has been one of the best-performing shares in Singapore over the past decade. From a price of S$0.96 at the start of 2005, shares of Vicom have since climbed by 558% to S$6.32 (as of 29 April 2015).
The company’s returns are even more remarkable when we consider that Singapore’s market barometer, the Straits Times Index (SGX: ^STI), had delivered gains of “just” 69% over the same time frame.
But, can the company continue being a great investment? A large part of the answer to the question resides in the quality of Vicom’s business, keeping in mind the idea that it’s the performance of a share’s business which drives its price over the long-term.
Clues for quality
Here’s a useful nine-point checklist – designed by investor and author Pat Dorsey and found in his book The Five Rules for Successful Stock Investing – which can help in assessing the quality of a business:
- The firm provides regular financial updates, has a long track record as a publicly-listed entity, and has a market capitalisation that isn’t too small.
- It has consistently earned an operating profit.
- It has generated consistent operating cashflow.
- The firm earns a good return on equity.
- It has been able to grow its earnings consistently.
- It possess a clean balance sheet.
- The firm can generate lots of free cash flow.
- There are infrequent appearances of one-time charges.
- There has not been major dilution of shareholders’ stakes in the firm.
The checklist is meant to help quickly sift out companies with quality businesses that are worthy of a deeper look by investors; companies which can tick most boxes in the checklist would likely by good businesses.
For a deeper look as to why the checklist makes sense in the context of finding a quality company, you can check out my colleague Chin Hui Leong’s work. It’s a three-part series, so here they are: Part 1, Part 2, and Part 3.
With that, let’s put Vicom to the test.
A strong showing
As a brief introduction, Vicom runs vehicle inspection and testing centres in Singapore and also provides a wide array of testing and certification services for a broad range of industries.
Vicom, with its 20 years of history as a publicly-listed firm (the company was listed in 1995), quarterly earnings releases, and sizeable market cap of S$570 million, has aced Dorsey’s first criterion.
The chart below (Chart 1) provides a snapshot of how Vicom has been able to consistently generate operating income, net income, operating cash flow, and free cash flow from 2004 to 2014. What’s more, all four important financial metrics have also been growing in almost clockwork-like fashion. Given these, Vicom would clearly deserve a tick in the box for criteria 2, 3, 5, and 7.
Source: S&P Capital IQ
Chart 2 below plots Vicom’s returns on equity and key balance sheet figures for the same timeframe as above. As you can tell, the company has not only managed to generate a very strong average return on equity of 22% over the period under study, it has also done so with a fortress-like balance sheet that has carried zero debt since 2005.
This is remarkable because leverage is often used by companies to help juice their returns on equity; in Vicom’s case, it has managed to generate its high returns without the need for debt.
With that, the company has certainly scored well for criteria 4 and 6 in Dorsey’s checklist.
Source: S&P Capital IQ
We’re down to the penultimate criterion on the checklist and this is where Vicom shines too – the firm has hardly incurred any significant “one-time” charges over the past decade.
Source: S&P Capital IQ
The last chart (Chart 3) shows us how Vicom’s share count has changed from 2004 to 2014. While there’s been some slight increase over the years, it’s worth pointing out that Vicom’s share count has been inching up at just 0.7% per year on average for the period we’re looking at. That hardly counts as major dilution and so, Vicom would deserve a “yes” here as well.
A Fool’s take: 9 points for a champ
In a round up of the scores, we have Vicom acing all nine measures found in Dorsey’s checklist. This is a sign that the firm may possess a strong business and can thus stand a chance of being able to continue being a great investment.
But that said, more work needs to be done beyond this before any investing decision can be reached; Dorsey’s checklist had been designed to help narrow the field and wasn’t meant to be used to pick investments.
The strength of a company’s business is just one piece of the puzzle (albeit an important one) – there are other crucial factors to consider too, such as the firm’s future prospects and valuation.
June 6, 2014
Vicom (SGX: V01) might be a small fish in the big ocean of our financial markets with a market capitalisation just north of S$520 million.
But, it’s a company that will likely be familiar to most drivers here in Singapore – the company runs seven out of the nine vehicle inspection centres here. Depending on the type and age of the vehicle, drivers would have to send in their vehicles for inspections ranging from once every six months to once every two years.
For dividend investors looking out for both high yields and growing pay-outs, Vicom would also likely be a familiar company. Turning first to its yield, the company’s annual dividend in 2013 was S$0.225 per share. This translates into a trailing dividend yield of 3.8% at Vicom’s current share price of S$5.92. In contrast, at the Straits Times Index’s (SGX: ^STI) current level of 3,299 points, it’s carrying a yield of only around 2.7%.
As for Vicom’s track record in growing dividends, it is aptly summarised in the table below:
| Year | Dividends per share (Singapore cents) |
| 2003 | 6.30 |
| 2004 | 5.75 |
| 2005 | 8.50 |
| 2006 | 11.9 |
| 2007 | 15.5 |
| 2008 | 9.25 |
| 2009 | 11.8 |
| 2010 | 16.1 |
| 2011 | 17.6 |
| 2012 | 18.2 |
| 2013 | 22.5 |
Source: S&P Capital IQ
With such a track record, a question might pop into mind: Can it continue growing those pay-outs? For starters, I’ve previously shared three important financial characteristics that shares with solid dividends ought to display: 1) A track record of growing dividends; 2) an ability to generate free cash flow that’s consistently higher than its dividend; and 3) a strong balance.
Vicom has aced those historical measures. And, there are other signs that the company might continue doing well.
In 2010, the company’s vehicle inspection business and other ancillary services had provided roughly one-third of its revenue and two-third of its profits (Vicom has stopped breaking down its revenue and profit segments from 2011 onward). In this segment, with its leading market share (as judged from the number of centres it owns), it’s easy to see how the company could have the ability to easily raise its fees. This is especially so given that the vehicle inspections are mandatory. According to analysts, as of 9 May 2014, the last time Vicom had raised fees was in 2006. Any potential fee hikes could be a boon for the company.
The authorities had reduced the annual growth rate of Singapore’s total vehicle population in 2009 from 3% to 1.5%. Then, in 2011, the growth rate was further slashed to 0.5%, which would be maintained till January 2015. Would authorities prevent Singapore’s vehicle population from growing further come 2015? That’s a plausible scenario, though unlikely as the population of people in Singapore is expected to continue to grow. And as long as the overall vehicle population can increase, that’s a tailwind for Vicom given its inspection services caters for “all types of vehicles, such as cars, light goods vehicles, commercial vehicles, motorcycles, heavy goods vehicles, buses and taxis.”
Vicom’s other line of business is housed under its Setsco subsidiary. Setsco’s bread and butter is the provision of “a comprehensive range of testing, calibration, inspection, certification, consultancy and training services to key markets such as Oil & Gas, Aerospace, Marine, Food, Electronics, Environmental, Construction, and Building & Facilities.” In 2010, the subsidiary had been responsible for roughly two-thirds of Vicom’s revenue and one-third of its profit.
Setsco was acquired by Vicom in 2003 for S$15.7 million. In that year, Setsco had brought in annual revenue of S$22.8 million. Despite competing against much bigger rivals (Setsco’s competitors include SGS SA and Bureau Veritas; in 2003, their annual revenues were approximately S$3.37 billion and S$2.75 billion respectively), Setsco had managed to more than double its top-line to S$51.4 million in 2010. Vicom’s management remains confident of Setsco’s progress and commented in the company’s latest first quarter results that “the non-vehicle testing business [referring to Setsco] is expected to grow despite the keen competition.”
Of course, it’s not all a bed of roses for the company either. There are still risks involved. The total vehicle population in Singapore is very important for the company as vehicle testing and its ancillary services are such an important part of Vicom’s business; the negative impact on the company from any possible fall in vehicle numbers could be huge. Latest figures from the Land Transport Authority though, have been promising:
| Year | Total vehicle population |
| 2009 | 925,518 |
| 2010 | 945,829 |
| 2011 | 956,704 |
| 2012 | 969,910 |
| 2013 | 974,910 |
Source: LTA
Opacity in its financial figures is also one source of risk. Since 2011, Vicom has stopped providing a breakdown of its revenue and profit sources as mentioned earlier. This leaves investors with little to work with in regard to the progress of both Setsco and the vehicle inspection business. It’s not an ideal situation as that could leave investors blind-sided should there be deterioration in one part of the business that might just weigh down the company’s overall results in the future.
All told, Vicom’s tailwinds could be summarised as such: 1) Pricing power in its largest profit driver; 2) likely growth in vehicle population; and 3) a resilient and capable non-vehicle testing business.
Risks in the company though, in my opinion, are: 1) Vehicle populations could still fall; and 2) there’s no clear breakdown of its revenue and profit sources, leaving investors with a slightly cloudy picture of its future.
27 FEBRUARY 2014
The commercial inspection and testing firm continued its steady-eddy growth path in 2013 as its latest results for the year showed its revenue had increased by 8.1 percent to $105 million with profits growing at 7.7 percent to S$28.4 million, translating into an earnings per share increase of 7.4 percent to $0.322.
At the company’s current share price of $5.82, it’s valued at 18 times trailing earnings and carries a historical dividend yield of 3.9 percent based on its annual dividend for 2013.
This brings me to Vicom’s dividends. In line with the company’s results, annual dividends of $0.225 per share were declared, making it five consecutive years of annual dividend increases for the company.
Source: S&P Capital; Vicom’s Earnings Releases
My Verdict?
On my watch list. Need to find out more information on Setsco. I like the fact that the dividend seems to be growing, and that it is not very leveraged and thus be affected by interest raise.
