VICOM

* An excellent business possibly worth much more than the current $5.6

* The dampener is low visibility on revenue growth, which has been slow & anemic.

* Given the disruptions in car-ownership patterns, how long can the business survive?

* Is it a just safe 2-3 year short term investment with good div yield?

(07-11-2016, 01:22 PM)Muser Wrote: * An excellent business possibly worth much more than the current $5.6

* The dampener is low visibility on revenue growth, which has been slow & anemic.

* Given the disruptions in car-ownership patterns, how long can the business survive?

* Is it a just safe 2-3 year short term investment with good div yield?

Most people already know what kind of data analysis is required to largely project VICOM's future revenue. So, it is not "low visibility on revenue growth", but in fact "high visible on revenue trends", especially with its non-vehicular biz (NDT for construction/OnG biz) also experiencing similar slow-down. The market is quite efficient on pricing VICOM based on the high visibility, IMO. In addition, it is definitely not going to be a 2-3year short term investment.

I am not sure how car-ownership pattern disruptions could (negatively) affect the survivability of VICOM's vehicular testing biz?
- Uber/Grab are under "private hire cars" and have the same inspection schedule as privately owned cars. In fact, there could be a tail wind if LTA regulation decide to change their classification under "taxis" to slightly level the field between taxis and Uber/Grab.
- CNG vehicles need to separately check their CNG tank, and so it is a plus.
- Electric vehicles should follow very similar inspection test/schedule as their petrol guzzling cousins (http://www.vicom.com.sg/inspection1.htm) since the carriage/sound/alignment/brake/headlight tests are all the same.

I would like to chip in with my views on Vicom.

I see Vicom to be very much a bond-like equity investment. For one, the cash flow and the dividend (which is anomalous to a coupon) is rather predictable. As a business, I like Vicom because its return on asset and equity has been pretty solid on a historical basis. I perceive the recent drop in the share price to be a decrease in line with the cycle that Vicom is in – the vehicle inspection fees line up with the 10 year COE cycles. As of now, Vicom is on the trough of the cycle though I am more optimistic of the ability of vicom to collect vehicle inspection fees in the future. With upward pressure on COE prices, many people would just extend their COEs on their existing cars which means the impact on revenues due to the release of new cars would be somewhat blunted. With recent deregistrations, it will be about 3 years before the vehicle testing revenues will pick up again.

In the meantime, my hope / expectation will be that management trims costs to mitigate the revenue hit and in time to come and with automation, that the revenues will come back in a time where Vicom would be positioned to make such revenues without having to have the corresponding increase in labour.

Generally speaking, I find there to be many things to like about this business: (a) stable management, (b) decent dividends (and dividend payout ratios), © strong cashflows, (d) almost monopolistic position in the market, and (e) very low y-o-y capex requirements.

On the flip side, there are a few things which I hate about this business:
• The revenue break down on the inspection and testing segment and the vehicle testing segment is not there. In general, there is not a whole lot of visibility on the business and it is (to an extent) a buy, hold and pray sort of business.
• Though the management has appeared to do a good job in reining in costs, I find the lack of effort to push the top line further to be quite disappointing. It seems to me that some are content with resting on their laurels and there is (at least to my knowledge) no concerted effort to at least attempt to grow the topline.

Which leads me back to my original point: That I view this to be very much a bond like equity investment – the business has no debt so, what you see is really what you get.

(07-11-2016, 06:05 PM)hailstorm87 Wrote: On the flip side, there are a few things which I hate about this business:
• The  revenue break down on the inspection and testing segment  and the vehicle testing segment is not there.  In general, there is not a whole lot of visibility on the business and it is (to an extent) a buy, hold and pray sort of business.
• Though the management has appeared to do a good job in reining in costs, I find the lack of effort to push the top line further to be quite disappointing. It seems to me that some are content with resting on their laurels and there is (at least to my knowledge) no concerted effort to at least attempt to grow the topline.  

Which leads me back to my original point: That I view this to be very much a bond like equity investment – the business has no debt so, what you see is really what you get.

hi hailstorm87,
you have a good analogy of the equity bond (i first heard of it when reading WB's annual letters). For the "few things you hate about this business", if you haven't read through the previous VICOM posts from 2010 onwards, contributed by VBs of past/present and spanning over 40 threads, then you should.

The "first hate" has been previously updated by VBs a few years back. When SETSCO was first acquired, Mgt did break down the business in the financial reporting until they realized that competitors were reverse engineering the results to understand their margins.
As for the "2nd hate", it is quite subjective. The past annual reports do provide some good read about the expansion or upgrade of their non-vehicular testing capabilities and competencies. It is mindful to note that non-vehicular testing follows the general SG business cycle rather closely, just like how vehicular testing follows COE availability/prices. Sometimes, it pays to sit on cash, which is close to 100mil now and simply enjoy the inactivity. Mgt acquired SETSCO from Keppel Corp in 2003 and has not looked back. Maybe Mgt is waiting to repeat their asset allocation feat.

(07-11-2016, 05:01 PM)weijian Wrote:

(07-11-2016, 01:22 PM)Muser Wrote: * An excellent business possibly worth much more than the current $5.6

* The dampener is low visibility on revenue growth, which has been slow & anemic.

* Given the disruptions in car-ownership patterns, how long can the business survive?

* Is it a just safe 2-3 year short term investment with good div yield?

Most people already know what kind of data analysis is required to largely project VICOM's future revenue. So, it is not "low visibility on revenue growth", but in fact "high visible on revenue trends", especially with its non-vehicular biz (NDT for construction/OnG biz) also experiencing similar slow-down. The market is quite efficient on pricing VICOM based on the high visibility, IMO. In addition, it is definitely not going to be a 2-3year short term investment.

I am not sure how car-ownership pattern disruptions could (negatively) affect the survivability of VICOM's vehicular testing biz?
- Uber/Grab are under "private hire cars" and have the same inspection schedule as privately owned cars. In fact, there could be a tail wind if LTA regulation decide to change their classification under "taxis" to slightly level the field between taxis and Uber/Grab.
- CNG vehicles need to separately check their CNG tank, and so it is a plus.
- Electric vehicles should follow very similar inspection test/schedule as their petrol guzzling cousins (http://www.vicom.com.sg/inspection1.htm) since the carriage/sound/alignment/brake/headlight tests are all the same.

Hi weijian, 

i like your spirited defence. I like the company too. 

The question is can we bet on its future revenue growth or consider it as just a good short-term dividend play.

(07-11-2016, 09:41 PM)weijian Wrote:

(07-11-2016, 06:05 PM)hailstorm87 Wrote: On the flip side, there are a few things which I hate about this business:
• The  revenue break down on the inspection and testing segment  and the vehicle testing segment is not there.  In general, there is not a whole lot of visibility on the business and it is (to an extent) a buy, hold and pray sort of business.
• Though the management has appeared to do a good job in reining in costs, I find the lack of effort to push the top line further to be quite disappointing. It seems to me that some are content with resting on their laurels and there is (at least to my knowledge) no concerted effort to at least attempt to grow the topline.  

Which leads me back to my original point: That I view this to be very much a bond like equity investment – the business has no debt so, what you see is really what you get.

hi hailstorm87,
you have a good analogy of the equity bond (i first heard of it when reading WB's annual letters). For the "few things you hate about this business", if you haven't read through the previous VICOM posts from 2010 onwards, contributed by VBs of past/present and spanning over 40 threads, then you should.

The "first hate" has been previously updated by VBs a few years back. When SETSCO was first acquired, Mgt did break down the business in the financial reporting until they realized that competitors were reverse engineering the results to understand their margins.
As for the "2nd hate", it is quite subjective. The past annual reports do provide some good read about the expansion or upgrade of their non-vehicular testing capabilities and competencies. It is mindful to note that non-vehicular testing follows the general SG business cycle rather closely, just like how vehicular testing follows COE availability/prices. Sometimes, it pays to sit on cash, which is close to 100mil now and simply enjoy the inactivity. Mgt acquired SETSCO from Keppel Corp in 2003 and has not looked back. Maybe Mgt is waiting to repeat their asset allocation feat.

The counter points on your point on my 'first hate' - is I find the reverse engineering argument pretty weak. I dont see any downside with revealing top line revenue and then combine the costs for the vehicle testing and SETSCO to 'mask' margins. I must preface this with the caveat that I am not an accountant so I do not know of the accounting implications. Further, the explanation falls short of what I see in other companies (see for e.g. Apple's 10-K which is really comprehensive and Tai Sin's AR which also has a testing unit and had disclosed the segmental revenues (and I think profits)). 

On your second point of excess cash, my issue is that Vicom's management has not meaningfully deployed such capital for the benefit of the company. I do not believe Vicom's business to be capex intensive so the excess cash far exceeds the working cap needs of the company. Therefore, unless the management can provide a convincing reason as to why they are holding on to this cash, the cash should just be distributed back to shareholders so that shareholders can use it to invest in other businesses i.e. no one would buy a company sitting just on pure cash. Seeing that the SETSCO acquisition was done in 2003, I do not see any talks or exploration of opportunities being done by the management. In fact, I think that the management statements has been very much along the lines of the 'status quo' which came to me as a disappointment. 

That said, this is a good business (one can expect very reliable cashflows) coupled with the view that market demand will not abate any time soon moving forwards. And in these uncertain times, I guess it's always better to have an overly cautious management team running a very good business.

Catalysts wise - my hopes are pinned on: (a) price increase in inspection fees, (b) activist investors coming in to address the issues raised above, and (c ) expansion of business into a new (but somewhat related) segment. If and until the risk profile of this business increases, this is very much a bond like equity investment.

(vested)

@muser
I am vested in the company. But I like to think I am having a discussion more than trying to defend it per say. VICOM doesn't need me to defend it.
There is also no need to "bet on future revenue growth". As I mentioned, it is highly visible. You can just refer to the previous posts for further understanding. As a result of that, it is also not "a good short term dividend play".

@hailstorm87
Take a closer look at the financial statements again for segmental reporting again. Also, the logic to have what one company practises, to be imposed on another, does sound weird to me. Not breaking down segmental results actually work fine for me. It makes fundamental analysis harder and the market slightly less efficient.
As for the 2nd pt on cash, I realized it is pretty subjective (again, this is what makes markets interesting) and so I think let's leave it as such.

Sorry to jump in boys, Vicom announced their 3Q results yesterday, 9 Nov 16.

http://infopub.sgx.com/FileOpen/VICOM_3Q...eID=428349

1. Revenue for the third quarter was $25.4 million, down 0.1% from the same quarter a year ago. Net profit attributable to shareholders also fell by 7.9% year-on-year to $6.7 million. Earnings per share was 7.67 cents in the reporting quarter, down 7.8% from the 8.32 cents recorded in the same quarter last year.

2. Cash flow from operations before changes in working capital came in at $9.6 million while capital expenditure (capex) was around $1.1 million. This provided Vicom with $8.5 million in free cash flow.

3. As of Sep 2016, Vicom had $95.9 million in cash and equivalents and no debt. This is a decrease from the net cash balance of $100 million recorded at the end of last year.

4. Demand for vehicle testing services will continue to be impacted as more vehicles will be deregistered during the year. Demand for non-vehicle testing services is not expected to improve with the continuing slow down in the industries that Vicom served.

@Hailstorm87 and @weijian, with regards on cash, so far they had been managing the cash account pretty consistently. This is because the cashflow from operations had been predictable and consistent. However, as mentioned by weijian, earnings visibility is pretty clear on the Vehicle inspection segment at least for the next 3 years. With the current slowdown at SETSCO together with declining revenue from vehicle inspection, assuming Vicom intends to keep dividend (around $20+ million a year) as consistent as possible, how much is required as cash to buffer for the next 3 years, especially with so much political and financial turmoil happening in 2016 and going ahead?

Having said that, perhaps management could do a better job at communicating with us on the intention of holding that much cash at this current moment.

(vested)

_________________________________

Financial Freedom can be achieved through prudence and patience capital.

http://www.bytesizedinvestments.com/

If I were the majority shareholder with 67% stake, I would contemplate privatizing VICOM, a la Super Group & ARA Asset, for foll. reasons

1. Depressed markets & valuations - good time to buy out minority shareholders and own 100%
2. I don't need public equity support. Business generates enough cash for operations & more
3. Market is uncertain & not giving due value to the business
4. I would conserve dividends and use free cash generated to re-build business, without the distractions of being a public company
5. I only need to worry about opportunity costs - using the cash for other better opportunities vs privatizing the business
6. Minority shareholders, even those with a long-term orientation, may be willing to sell out in these depressed markets. Patience is not a popular virtue.

Financial Results for the year ended 31 December 2016

Highlights :
* Revenue for FY2016 was 101.18 million, down 5.2% from previous year.
* EBITDA margin was 38.4% versus previous year 39.9%.
* Net cash from operation activities for FY2016 was 33.21 million versus 36,35 million previous year.
* Net cash used in investing activities for FY2016 was 2.58 million versus 2.93 million previous year.
* Profit after taxation was 28,60 million, down 10.3% from previous year.
* Proposed final and special dividends of 8.5 cents and 10 cents. Total 18.5 cents versus previous corresponding period of 19.75 cents. Down 6.3%.

More details in http://infopub.sgx.com/FileOpen/VICOM_FY...eID=438306