Vicom
Sunday, June 8th, 2008
Business
Vicom is Singapore’s leading provider in technical testing and inspection services. Listed in 1995, they have 4 business segments: Vehicle inspection business, vehicle assessment, commercial/industrial testing and other services. Vicom group consists of VICOM and JIC inspection centres, VICOM assessment centre (VAC) and SETSCO services. VICOM and JIC centre is a one stop inspection service provider. VAC provides a one-stop, post-accident service solution like towing, car rentals, assistance in accident reporting, claims filing, repairs and safety check through its IDAC. SETSCO is the non-vehicular and testing arm dealing with a range of industry.
% of revenue-----------------------------04-----------05------------06------------07
Vehicle inspection---------------------25.7----------29.6----------30.1----------31.3
Vehicle assessment--------------------13.9-----------8.9-----------5.2-----------4.0
Test/inspection services--------------51.4----------54.8----------56.5----------57.9
% of segment results to revenue-----04-----------05------------06------------07
Vehicle inspection---------------------19.2----------29.8---------33.8----------34.8
Vehicle assessment--------------------17.1-----------2.0---------(3.5)----------(0.2)
Test/inspection services--------------18.9----------28.8---------28.6----------28.2
% of market share in vehicle inspection market in Singapore
FY05--------75%
FY06--------73.15%
FY07--------not sure
We can see from the breakdown of margins and revenue by their business segments that their vehicle assessment is not doing too well. Their main business would be from SETSCO and VICOM centres. Their vehicle assessment centre drops after FY05 because of a new ruling that makes it no longer compulsory for motorists to make accident reports at their IDAC (talk about removing monopoly status). But their vehicle inspection business seems to be monopolistic in nature, owning around 75% of market share in Singapore.
Growth prospects
Their vehicle inspection business depended on the price of COE. When COE prices drop, more new vehicles will be on the road, so needing less inspection. Conversely, when COE prices increases, their vehicle inspection revenue usually increases. There is another development with regards to the decline in motor insurance underwriting profits. VAC will play a leading part in this new development, so they say.
Test/inspection services segment might be better in FY08 as the demand for non-vehicular testing and inspection is expected to increase with the construction of the IR and the two cracker plants at Jurong Island and Pulau Bukom. Marine/offshore/oil/gas sector can lead to higher demand too.
Analysis
I'm skimming through the annual reports, so I admit I didn't pay close attention. Just important numbers to give me a sense of their business.
Revenue grew at a CAGR of 11.4%, with the most recent FY06 to FY07 change of 13.7%. Profit after tax and minority interest (PATMI) grew at CAGR of 20.7%. Vicom has good cash holdings, generates good flow of cash from its operations and has rather low debts. It pays a healthy dividend (not to mention fat) too.
Take a look at their ratios.
* Take note that the 17.5% figure to the right of ROE is not the CAGR. It's the simple average of all the years. My bad.
Gross margins is rather stable at around 22 to 26% and PATMI margins around 16 to 20%. Unless Vicom's vehicle inspection segment improves in revenue growth, I wouldn't expect the margins to improve much. That being said, the profit margin is at a good level. I'll be happy if they maintain this level of margin ad infinitum.
ROE seems to be improving from 14.5% in FY04 to the present 23.2% in FY07, averaging around 17.5%. EPS is growing at a rather slow rate if we discount FY07 results. Since their payout ratio of over 90% makes their retained earnings low, their book value per share also increases slowly. Not sure if they can continue paying such high payout ratios of nearly 98% in FY06 and FY07. Maybe they really don't have any use of their money since they generate such a healthy cash flow.
No signs of insolvency at all, with current ratio around 1.3 levels on average. Their balance sheet is strong, with debt to equity of around 30% to 70%. Coupled with a strong cash flow, this company can easily survive leaner times.
Valuation
I did a ten year projection of earnings after minority interest and tax, with no perpetuity value, and using a range of discount rate and earnings growth. Personally, I think an earnings growth of 10% and discount rate of 4% sounds pretty reasonable.
Playing around with various discount rates and earnings growth gave me a range between 1.97 to 3.08. Using a earnings growth of 10%, I get a 10 year EPS projection of $0.41 in 2017. Looking at the historical PE ratios between a low of 6.8x to a high of 12.1x, we get a price in 2017 between $2.79 to $4.96.
I'm quite comfortable with a value between $2.21 to $2.79 in ten years investment horizon.
At last close of $1.92, here's snapshot of current market valuation based on FY07:
PE = 12x
Dividend yield = 7.8%
Price to book = 2.7x
To get 15% returns over 10 yrs, I need to enter around a price of 0.50 to 0.60 cts - erm...possible? But that's capital gains. The dividends given out here is the real draw of this investment. Doing a 10 yrs dividend per share projection with no perpetual value using different discount rates and dividend growth rate, here's what I got:
Historical CAGR of dividends growth rate is 50%, with the recent FY06 to FY07 increase in dividends per share of 28.8%. I think with a dividends growth of just 10% at 4% discount rate, we'll get back $2.07 worth of dividends in ten years, which is more than the price per share paid at $1.92 last close. If I still want 15% yield on dividends, I need to purchase at $1.00. If I want 10% yield on dividends, I need to purchase at $1.50.
Note: Comfort Delgro owns 69.68% of Vicom. Only around 27% of the shares are floating around the market, which makes this highly illiquid. The bid spread is very wide as a result, with last trading day spread of 1.880/1.920, with no volume transacted.
Conclusions:
Doesn't look like much of a bargain here until it drops to 1.50 or below. Given the liquidity (or lack of) of Vicom shares, I think this is a keep-in-view case. Perhaps I'm overly bearish in the valuation.
Vicom is Singapore’s leading provider in technical testing and inspection services. Listed in 1995, they have 4 business segments: Vehicle inspection business, vehicle assessment, commercial/industrial testing and other services. Vicom group consists of VICOM and JIC inspection centres, VICOM assessment centre (VAC) and SETSCO services. VICOM and JIC centre is a one stop inspection service provider. VAC provides a one-stop, post-accident service solution like towing, car rentals, assistance in accident reporting, claims filing, repairs and safety check through its IDAC. SETSCO is the non-vehicular and testing arm dealing with a range of industry.
% of revenue-----------------------------04-----------05------------06------------07
Vehicle inspection---------------------25.7----------29.6----------30.1----------31.3
Vehicle assessment--------------------13.9-----------8.9-----------5.2-----------4.0
Test/inspection services--------------51.4----------54.8----------56.5----------57.9
% of segment results to revenue-----04-----------05------------06------------07
Vehicle inspection---------------------19.2----------29.8---------33.8----------34.8
Vehicle assessment--------------------17.1-----------2.0---------(3.5)----------(0.2)
Test/inspection services--------------18.9----------28.8---------28.6----------28.2
% of market share in vehicle inspection market in Singapore
FY05--------75%
FY06--------73.15%
FY07--------not sure
We can see from the breakdown of margins and revenue by their business segments that their vehicle assessment is not doing too well. Their main business would be from SETSCO and VICOM centres. Their vehicle assessment centre drops after FY05 because of a new ruling that makes it no longer compulsory for motorists to make accident reports at their IDAC (talk about removing monopoly status). But their vehicle inspection business seems to be monopolistic in nature, owning around 75% of market share in Singapore.
Growth prospects
Their vehicle inspection business depended on the price of COE. When COE prices drop, more new vehicles will be on the road, so needing less inspection. Conversely, when COE prices increases, their vehicle inspection revenue usually increases. There is another development with regards to the decline in motor insurance underwriting profits. VAC will play a leading part in this new development, so they say.
Test/inspection services segment might be better in FY08 as the demand for non-vehicular testing and inspection is expected to increase with the construction of the IR and the two cracker plants at Jurong Island and Pulau Bukom. Marine/offshore/oil/gas sector can lead to higher demand too.
Analysis
I'm skimming through the annual reports, so I admit I didn't pay close attention. Just important numbers to give me a sense of their business.
Revenue grew at a CAGR of 11.4%, with the most recent FY06 to FY07 change of 13.7%. Profit after tax and minority interest (PATMI) grew at CAGR of 20.7%. Vicom has good cash holdings, generates good flow of cash from its operations and has rather low debts. It pays a healthy dividend (not to mention fat) too.
Take a look at their ratios.
* Take note that the 17.5% figure to the right of ROE is not the CAGR. It's the simple average of all the years. My bad.Gross margins is rather stable at around 22 to 26% and PATMI margins around 16 to 20%. Unless Vicom's vehicle inspection segment improves in revenue growth, I wouldn't expect the margins to improve much. That being said, the profit margin is at a good level. I'll be happy if they maintain this level of margin ad infinitum.
ROE seems to be improving from 14.5% in FY04 to the present 23.2% in FY07, averaging around 17.5%. EPS is growing at a rather slow rate if we discount FY07 results. Since their payout ratio of over 90% makes their retained earnings low, their book value per share also increases slowly. Not sure if they can continue paying such high payout ratios of nearly 98% in FY06 and FY07. Maybe they really don't have any use of their money since they generate such a healthy cash flow.
No signs of insolvency at all, with current ratio around 1.3 levels on average. Their balance sheet is strong, with debt to equity of around 30% to 70%. Coupled with a strong cash flow, this company can easily survive leaner times.
Valuation
I did a ten year projection of earnings after minority interest and tax, with no perpetuity value, and using a range of discount rate and earnings growth. Personally, I think an earnings growth of 10% and discount rate of 4% sounds pretty reasonable.
Playing around with various discount rates and earnings growth gave me a range between 1.97 to 3.08. Using a earnings growth of 10%, I get a 10 year EPS projection of $0.41 in 2017. Looking at the historical PE ratios between a low of 6.8x to a high of 12.1x, we get a price in 2017 between $2.79 to $4.96.
I'm quite comfortable with a value between $2.21 to $2.79 in ten years investment horizon.
At last close of $1.92, here's snapshot of current market valuation based on FY07:
PE = 12x
Dividend yield = 7.8%
Price to book = 2.7x
To get 15% returns over 10 yrs, I need to enter around a price of 0.50 to 0.60 cts - erm...possible? But that's capital gains. The dividends given out here is the real draw of this investment. Doing a 10 yrs dividend per share projection with no perpetual value using different discount rates and dividend growth rate, here's what I got:
Historical CAGR of dividends growth rate is 50%, with the recent FY06 to FY07 increase in dividends per share of 28.8%. I think with a dividends growth of just 10% at 4% discount rate, we'll get back $2.07 worth of dividends in ten years, which is more than the price per share paid at $1.92 last close. If I still want 15% yield on dividends, I need to purchase at $1.00. If I want 10% yield on dividends, I need to purchase at $1.50.
Note: Comfort Delgro owns 69.68% of Vicom. Only around 27% of the shares are floating around the market, which makes this highly illiquid. The bid spread is very wide as a result, with last trading day spread of 1.880/1.920, with no volume transacted.
Conclusions:
Doesn't look like much of a bargain here until it drops to 1.50 or below. Given the liquidity (or lack of) of Vicom shares, I think this is a keep-in-view case. Perhaps I'm overly bearish in the valuation.
