VICOM

[wee]

With respect to the land which VICOM holds (and which some forumers say is under-valued in the Balance Sheet), how likely is it for the Company to be able to unlock its value? If possible, this would make VICOM a good asset play, along with steady and consistent dividends.

I like this company. But note that the land's carrying value in the book should not be too far off the actual value. These are industrial land and leases are probably short, like 30 years. Limited use - you are not going to be able convert them into a condo development.

[Musicwhiz]

I like this company. But note that the land's carrying value in the book should not be too far off the actual value. These are industrial land and leases are probably short, like 30 years. Limited use - you are not going to be able convert them into a condo development.

If what you say is true about the land value approximating its fair value in the Balance Sheet, then there is not much potential for exceptional gains arising from the sale of this land.

Looking at VICOM from purely a cash flow perspective, I would say it's a very well-run company. From a valuation perspective, it may seem a little expensive. But from an asset play point of view, assuming that fact hinges on this piece of land being significantly under-valued, then I'd say an investor ought to establish if this is so before committing funds to purchase shares of the Company.

Not Vested.

[dydx]

Vicom through subsidiary Setsco has set up a new 49/51 j-v in Abu Dhabi, UAE, with Dubai-based Ali Omran Al Owais Invesment Company LLC, to provide Setsco's technical testing and inspection services in UAE.....
http://info.sgx.com/webcoranncatth.nsf/V...E0034A040/$file/JVSMEL.pdf?openelement

More background info on Ali Omran Al Owais Invesment Company LLC.....
http://aoguae.com/home.htm

UAE and Middle-East, here comes Setsco and Vicom!

[lonewolf]

jianjian, I think from third yr onwards, cars need to go for inspection every yr (http://www.vicom.com.sg/inspectionprice.htm)

Jianjian is correct. Only cars that are > 10 yrs need to go for inspection every year. Cars that are less than 10 yrs need to have inspection biennially ie. once in 2 yrs.

[redcorolla95]

My maiden posting on the last day of my vacation.

Vicom is a compelling investment on the basis of its quality, growth & valuation.
It has 2 main segments: vehicle inspection (quite well-known), and testing services (less well-known).

dydx earlier wrote a concise overview

The main driver for Vicom's 2 core businesses - vehicles inspection; and other inspection/certification services under subsidiary SETSCO - is primarily based on government regulations and controls on public safety, product safety, environmental protection, technical specifications in certain commercial/industrial activities, etc. Historically, all these have incresaed over time, and will continue to increase if we believe the Singapore government is a responsible one and will continue to exert more control on certain activities and other aspects in our economy. In an urbanized environment like ours in Singapore, and as more complex products/technologies and activities emerge in Singapore over time, there should be more such government regulations and controls being introduced. This explains why Vicom's overall business volume, revenue and profits continue to grow yearly, and why Vicom has proven to be a great investment for its loyal shareholders and early investors.

Of course, as an additional bonus, we should not forget Vicom with its 7 vehicle inspection centres also owns quite a lot of valuable industrial land/space which has been deriving good rentals and is undervalued in its B/S.

To quantify their superior quality, growth & valuation:
All the info here is taken from their financial statements.

Quality:
Financial strength: Balance sheet is net cash, which keeps piling up.
ROE (ttm – Sep 2010): 28%
ROIC (ttm – Sep 2010, subtracting goodwill): 67%
For the above 2 key segments, return on tangible assets is above 200%.
Cash flow has been good. Since 2005, free cash flow has exceeded net income.
Management looks loyal & experienced. Key shareholder Comfort Delgro is also well-regarded.

Growth:
From 2005 – 2009,
Revenues: 12%,
Profits and cash flow: 22-23%
Dividends:15%
TTM Net income: 18%.
With Singapore vehicle owners being a generally affluent lot, Vicom has been able to offer more services like an emission testing lab in ’09, and is likely to be able to keep charging higher prices.
The testing arm continues to expand its client base to include IRs, oil & gas, chemicals etc and offer a greater range of capabilities.
With these 2 arms, it should grow faster than the average Singapore company.

Valuation:
After subtracting the $33.5m cash, at $2.93, the company is valued at 10.3x earnings (ttm), which is much cheaper than the STI.
With dividend yield of 4.2%, if we assume that dividends grow at half their historical growth rate (we put 7.3% here), and no change in valuation, we have a 12% total return, which is quite decent.

If dividends grow faster than 10% pa, and valuations improve (at least 50% higher), the returns can be quite compelling.

Risks:
Slowdown in vehicle population.
Testing arm may be sensitive to Singapore’s project investment cycles.
Volume is quite low.

Disclaimer: I own shares of Vicom.

[egghead]

I have also studied VICOM year ago but the one single reason that I did not take a position is the extremely low liquidity of this stock.

[yeokiwi]

Good stock => tightly hold => low liquidity.
Typically, it does not affect small investors that hold less than 100 lots.
Given enough time, it is not that difficult to clear 100 lots.
But, for investors with a few millions or tens of millions, VICOM probably is not a good investing target.
Since 100 lots = $293000. It will not move the portfolio much....

[dydx]

I have also studied VICOM year ago but the one single reason that I did not take a position is the extremely low liquidity of this stock.

The key reasons for Vicom's low liquidity are:
1. There are only 86.35m issued shares (as at 30Sep10). Vicom's management and BOD have deliberately kept the company's issued share base small all these years - likely because they want to discourage unnecessary active trading of the stock, or they are just happy to just to keep the stock within the domain of those buy-and-hold, long-term investors.

2. As the underlying businesses are of very high quality, and have continued to deliver steady growth, and preditable, solid profitability as well as very strong, positive FCF - plus the company has been paying out great, twice-yearly dividends - over the years, this stock has attracted the interest of more and more well-funded, long-term investors, who, together with Comfort Delgro as the controlling shareholder, have now formed a solid long-term shareholder base.

Over the years, Vicom as a stock has delivered a solid return on the share price for its long-term shareholders. This can be clearly understood from the stock price chart since 2004.....
http://finance.yahoo.com/q/bc?s=V01.SI+Basic+Chart&t=my
The approx. 270% price appreciation since Jan04 - i.e. over the last 7 years - is certainly quite impressive; the actual total shareholder return - including all the dividends paid since Jan04 - is even higher and should be something close to 350%.

It is also relevant to note that Vicom's share price has out-performed the STI (measuring the market average of blue-chips listed on SGX) by a big margin since 2004, especially from 2008 onwards.....
http://finance.yahoo.com/q/bc?t=my&s=V01...l&c=%5Esti

So indeed, Vicom as a long-term investment is even better than the average Singapore blue-chips!

[redcorolla95]

1. Good stock does not have to lead to low liquidity.
Liquidity is low as free float is low and the share-holders don't like to day-trade.
Buffett's largest positions are some of the most liquid & actively traded stocks: Coca Cola, Wells Fargo, Amex, P&G are very liquid.
However, with less liquid stocks, there is a higher chance of finding a mis-pricing.

2. Illiquidity should not have too large of an impact on retail investors who have a longer time horizon.
To be sure, you incur some costs when trading.
But if the time horizon is long enough, there is some intrinsic reward (3-4% pa) for holding an illiquid asset.
http://pages.stern.nyu.edu/~adamodar/pdf...uidity.pdf
One caveat: illiquidity makes certain situations more dangerous: securities such as structured products, distressed companies, or forced liquidations.
The principal is that stocks are a long-duration asset, and that money invested in them should not be needed in the short term.

[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.