VICOM

[brattzz]

i hope that VICOM will not venture into malaysian's VI sector... definitely a troublesome/loss-making venture! :O

[weijian]

i hope that VICOM will not venture into malaysian's VI sector... definitely a troublesome/loss-making venture! :O

hi brattzz,

I know most VICOM OPMIs love the stable cashflow from VI/SETSCO businesses (me inclusive). They form the basis for the predictable and sustainable dividends that we enjoy.

All startups are loss-making, until they are not (ie. when they have enough scale). There is nothing wrong to avoid losses. But if one were to try to avoid losses all the time, then one will also miss most opportunities for gains. This is true as an investor or an entrepreneur. Even an employee has to first give his/her time, before getting paid at the end of the month (abeit with more certainty than an investor/entrepreneur though!)

When we look at many of the local towkays, many of them have already ventured out into our ASEAN neighbours (especially Vietnam and Malaysia). As OPMIs, these gives us further exposure to faster growing economies.

Yes, venturing alone into an industry that is complicated with politics is dangerous and troublesome. After all, Puspakom was protected for 2 decades and the ultimate major owner is the richest Bumiputra in Malaysia. No surprises that the Msian Manpower minister had to come out openly and say that bumi jobs will not be affected with the on-going dismantling of all the monopolies by the Anwar Ibrahim administration. But there are many ways to mitigate this risk, the most obvious one being to partner with a small local tycoon who provides the locality expertise, while VICOM provides the technical expertise. After all, they were the consultants 20 years ago!

I personally hope the VICOM mgt will do a serious feasibility study at least as there is plenty of time before the licenses are open for application. Of course, this is just an OPMI's view

[D123]

I agree with the strong moat of VICOM, it's pricing power and well-managed acquisition of SETSCO.

My concerns are with:
1. The past 5 years' growth being mainly attributed to the growth of SETSCO. This segment, which represents about 50% of the company's earnings, is opaque and there is no clear indication of how long the explosive growth will last.

2. The company sitting on net cash of $0.26 per share and the net cash position being there for the past 3 years. Can they not find attractive opportunities for capital expenditure? Surely the newly acquired SETSCO should present several, otherwise, why did they acquire it? Certainly, Comfortdelgro has no incentive to release this cash as they can proportionately consolidate the cash balance onto their balance sheet anyway, and use it when raising debt etc. . This can be used to cover up under-performance in its other subsidiaries and the group as a whole.

3. Rental operating income being higher than rental revenue. I'm still trying to get my head around this.

4. New cars generating more income than old cars, and the impending cap on vehicular growth. First inspection costs twice as much as subsequent inspections and form more than half of total inspections each year (61% in 2009). The cap on vehicular growth will impact VICOM's vehicular inspection revenues. The additional repeat inspections from the aging profile of the car population will not fully compensate for the drop or stagnation in number of new vehicles getting there first inspections, (unless they revise the pricing structure, which theoretically speaking they could). This might not be severe since they have significant pricing power, but it does mean that one cannot expect vehicular inspection revenues to grow 15% to 20% like they did in the past. 

5. VICOM's P/E for the last 5 years not being higher than 12, and that was in 2006 or 2007 (I cannot recall right now), when market sentiment was still high. I doubt you can use P/E expansion (quality, out) as a reason for investing.

But my final and biggest reason against it is that given the good, not fantastic dividend yield, and lack of direction of drivers of growth and an above historical mean P/E of 11.3, suggests that there isn't enough margin of safety in this good but not great company.

More than 12 years on, shareholders who owned VICOM from 31 Dec 2010 until today are likely sitting on a CAGR of 8.5% in the price of the stock, and an additional 5% through dividends if reinvested. The absolute return itself would have been more than satisfactory for many. That it also beats the STI handily despite having mainly exposure to the domestic market and currency is the icing on the cake.

redcorolla95 was one of those who shared many good comments on the company and I hope he's enjoying his winnings now.

[weijian]

It has been many years since parent CDG start to need VICOM's cash to be paid upwards to fight the sharing economy upstarts. VICOM has been paying out ~113% of NP (or 126% of FCF) in the last 5 years before FY22 (inclusive the bonanza from the HQ sale). So it is inevitable that payout ratio has finally reverted to a more sustainable 90% of NP in FY22. The amount of cash on the BS is also the lowest in the last 10 years. It has been a good ride for the OPMI positioning himself along side the parent.

Looking ahead, there are going to be 2 more sites that is up for lease renewal in 2025 and 1 in 2027 (For context, the Jalan Papan site to replace Pioneer road's 2024 lease expiry needs ~5mil CAPEX). With Mgt looking to expand SETSCO testing capabilities (buying new testing machinery), the CAPEX cycle seems to be turning "to the worst" for VICOM.

MINUTES OF THE FORTY-SECOND ANNUAL GENERAL MEETING (“AGM” OR “MEETING”) OF VICOM LTD (“COMPANY”) HELD ON WEDNESDAY, 26 APRIL 2023 AT 10.00 A.M. VIA ELECTRONIC MEANS AND AT THE AUDITORIUM, COMFORTDEGRO HEADQUARTERS, 205 BRADDELL ROAD, SINGAPORE 579701

Chairman explained that whether the high dividend payout was sustainable would depend on the cash flow needs of the Group and the new businesses that the Group went into. In relation to cash flow, Chairman said that the development of the Jalan Papan land would require a significant amount of cash. As for new businesses, it would take time for them to bear fruit. The Board would therefore have to carefully consider the dividend payouts in the coming years.

https://links.sgx.com/FileOpen/VICOM%20-...eID=758958

[weijian]

Jalan Papan site acquisition for business expansion (5mil for a 20yr lease) was first announced in FY22 results announcement. Fast forward slightly >1year later, OPMIs are informed that it cost 55mil to make it functional by 1Q26. For context, it was only in FY21 that ~25mil was spent on the new SETSCO HQ.

There are also a few sites for JIC/VICOM/SETSCO where their leases will expire in 2025. So that will be an additional CAPEX as well.

The capital cycle as decidedly turned against VICOM since 1 year ago, together with Mr Market's assessment.

MINUTES OF THE FORTY-THIRD ANNUAL GENERAL MEETING

Shareholder A also enquired on the period of cash drawdown for the Jalan Papan land, the lease tenure and the total capital expenditure for Jalan Papan.

CEO said that cash would be drawn down in accordance with the construction payment milestones, and that the lease tenure was 20 years from March 2023 to March 2043. The expected total capital expenditure was estimated at S$55 million, comprising S$40 million for the construction works and S$15 million for relocation and equipment purchase. CEO assured the Shareholders that Management had reviewed the cash flow requirements of the Group and had budgeted such that
there would be sufficient cash for operations even at the point where the cash outlay for Jalan Papan was expected to be the most intense. Upon completion of the Jalan Papan development, the Company would be able to build up its cash reserves again.

https://links.sgx.com/FileOpen/VICOM%20-...eID=802931