VICOM

[redcorolla95]

1. Profits are spread decently across both divisions, growing at 26+% over the last 5 years. Setsco revenues have been growing faster 15 vs 12% pa. dydx in post #5 makes the concise case for Setsco. And what it does looks quite transparent enough. More details from the AR 2009 pg 15: testing jobs in industries: IR, oil gas chem, env & water, structural steel, etc. Scope: radiography, ultrasonic testing, thermal conductivity. AR 2008 pg 4 has prime customers: Irs, ExxonMobil, PCS, Pinnacle, Keppel Land, pg 18 gives industries: construction, food, environmental, aerospace, marine and oil and gas sectors.

2. Comfort Delgro is a much larger company, the $33m cash is nothing to them. Q3 2010 they had $ 574m of it. They could issue a special dividend and have a much more aggressive capital structure. But their use of cash has been decent. If we look at Setsco, they bought it at $15m or 4.6x Earnings. In 2005, they bought Jurong inspection centre at 10x earnings. Acquisitions like that don’t come regularly, so I wouldn’t begrudge them for holding the dry powder.

3. Where did you get that figure from?

4. Yes vehicle growth will slow, but over the last 5 years, they have grown revenues & profits faster than vehicle growth by introducing more services and raising prices. This is through nasty recession in 08-09’ when COE prices dropped some-what.

5. Yes, you’re right, the PE has never been high – but markets can be wrong for a long time: you can refer to prices of Pfizer & Merck, Walmart etc in the earlier part of the decade. I had conservative assumptions that it would be the same and the growth rate would slow down by half, over the long run 12% return should do better than a typical stock average of 8-9%. If the growth rate slows less, the PE expands to a ‘typical stock level’, the return can be more compeling.

One more thing: with return on capital & growth rate both twice that of the average stock, and this is not ‘great’ enough, we’d all like to have some ideas on what’s ‘great’.

[valuehunter]

Think about it, even if VICOM's profits were to grow at a very conservative compounded rate of 5% per annum for the next 5 years, assuming dividend payout ratio to be 50% and its PE to remain at around 11x, my opinion is that current valuation relative to its possible future valuation is not that demanding at all despite its historical high price.

Long term investment in a proven solid business with good FCF, strong balance sheet and a decent moat should also involve looking at current valuations relative to what it may likely be some years down the road, taking into account dividends received and probable capital gains. Of course we need to be reasonably confident, in the first place, that such a business will continue to grow at a decent rate for the next 5-10 years at least.

Not intended to be an inducement to buy or sell the stock.

[Musicwhiz]

I'd actually done a cursory study of VICOM early last year, and though I'd agree it's a very good business to own, I was afraid of paying too much for it as it was trading at valuations which (to me) were not compelling.

But that's not a problem - I can just place this company on the backburner and "watch-list" to monitor it for the next 5 years. If there are opportunities which present themselves, I better make sure I have the cash to take advantage of them!

[lonewolf]

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).

I dun think the above is true. You may have misunderstand the pricing structure.

All car inspection regardless of age cost $58. The $29 re-inspection fees are for vehicles that failed the 1st inspection and have to go back to the testing centre. eg. illegal modification of exhaust.

So in fact, the increase in the average age of vehicle means more car inspections for Viacom. eg. If a person change his car every 5 years, he probably need to inspect his car 2 times the most. But if he holds it for >7 yrs, he will need to have his car inspected at least 3 times (excluding re-inspection charges)

[D123]

1. I am unfamiliar with the testing industry, but from a brief chat with someone at Singapore Accreditation Council, it seems a very fragmented one. The industry will likely be around and thriving 10 years from now because of the way Singaporean regulators and authorities work, demanding checks for everything. I'm just not sure a VICOM-like moat can be created around SETSCO. I put down a lot of its growth to its management's ability to operate at good margins, but without speaking to them, I hesitate to put too much of a premium on SETSCO's future growth. Certainly, I cannot say with confidence that they will grow at 15% p.a. for the next 5 years. But that is probably down to my lack of insight.

2. I started looking at VICOM late 2010 and only have ARs of VICOM from 2005 onwards. These terms of purchase look very good indeed, and gives a better impression of their capital allocation abilities. Where did you get them from?

3. AR 2009, Note 21.

4. I just checked about their fee structure, and yes, all car inspections regardless of age is $58. Sorry for the error made in the earlier post, and thanks goes to lonewolf for clearing my misunderstanding. I admit that the aging profile of the vehicular population will more likely mitigate the slowing of vehicular population growth.

Nevertheless, vehicle population growth has been positive for past 5 years. The question is how will annual vehicle inspection revenue growth look like if the government curbs vehicular growth to 0%, and the age profile of the population reaches a steady state (if it even does).

Year-on-year growth of vehicle inspection revenues have been slowing, and its operating margins have been increasing. How much higher can operating margins go? Once it plateaus, what is vehicle inspection income growth going to look like?

I think it is more likely to be in the single digits as it will likely be in FY2010, rather than the high twenties and thirties of previous years.

5. I just don't see a catalyst for P/E expansion. It is trading at almost 3X book value, so it's unlikely ComfortDelgro will buy it back at its current price. Low liquidity probably puts it out of the radar of many funds. Perhaps a competitor will buy out SETSCO, it's high growth arm, but where does that leave VICOM? Doesn't mean the catalyst wouldn't happen, I just don't see it yet. I would like for it to happen though.

Finally, VICOM does great on an operational level, but if its growth is capped to the Singapore market, then I can't say its a great company. Monopoly in a stagnating market doesn't mean much. It's like having the privilege not to queue at a small buffet. SETSCO is the main reason I'm optimistic about the company, yet I do not know enough about it.

[redcorolla95]

1. Well when fully matured, the testing & certification business e.g. CCG Veritas, Bureau Veritas, S&P, Moody’s trade at very high multiples. This is because the government / owner / public becomes risk-averse in a way and wants to see the inspection being approved by someone famous. With some equipment, lots of mechanics at Bt Merah, Sin Ming can do the sort of inspection that Vicom does, but they don’t come with the brand-name. I think Setsco doesn’t carry that cachet of the above yet, but it’s been humming along fairly nicely. We’re in a part of the world where life gets more precious each year, and Singapore’s safety and kia-see-ness can be nicely exportable.

2.
Vicom buys Keppel's Setsco unit for $15.7m.

By Nicholas Fang.
28 January 2003
Straits Times


VEHICLE inspection firm Vicom announced yesterday that it will be moving into the non-vehicle inspection business with the purchase of Keppel Corp's (KepCorp's) Setsco Services unit for $15.7 million.

The deal is set to double Vicom's turnover and significantly boost profits.

The mainboard-listed unit of taxi operator Comfort said at a signing ceremony yesterday evening that it had entered into a conditional sale and purchase agreement with Keppel Integrated Engineering, a wholly owned subsidiary of KepCorp, to buy its 100-per-cent interest in Setsco.

Setsco is one of the leading testing and inspection centres in Singapore and provides assessment and consultancy services to a wide spectrum of industries. It also has offices in Malaysia, Vietnam and China.

It tests and inspects materials such as concrete, paints and plasters, and some of its successful projects have included the second causeway at Tuas and the Keppel-Brani-Sentosa road link.

The first payment of $1.6 million out of the $15.7 million total price was made yesterday, with the balance to be paid in March upon completion of the sale.

The sale is subject to the approval of Vicom shareholders. Comfort Group, which holds 73.2 per cent of the issued share capital of Vicom, has given an irrevocable undertaking to vote in favour of the sale, Vicom said yesterday.

Vicom deputy chairman and chief executive Goh Chee Wee said at the signing ceremony: 'We have been in the testing and inspection business for some 20 years, but this is the first time we have expanded our services into the non-vehicle inspection business, so it is significant for us.

'This acquisition will more than double our turnover and will mean a substantial increase in net profit as well.'

The operating profit of Setsco before income tax for the year ended last December was $4.2 million while net tangible assets of the company totalled $5.8 million.

Keppel group finance director Teo Soon Hoe said that the sale of Setsco was part of the company's efforts to focus on its core business.

'Keppel will continue to divest its non-core assets even though they may be highly successful companies in order to channel greater resources to our core business,' he said.

3. pg 74. Rental income of $5.3m total sales are $8.1m. Inter-segment sales means they rented it to themselves. If we look at how they carry the leasehold buildings & land, they’re carrying $25.5m – since they’ve to rent some of it externally, the whole rent rate is probably fair. Which suggests that they’re carrying it quite conservatively on their BS.

4. Vehicle growth has been about 3% in previous years, so they’ve been able to grow a whole lot faster. A little like beer & cigarettes in rich countries, where prices can be raised to make up for falling volumes.

5. The catalyst might not come & liquidity is poor, but at the current valuation & economics, we can wait. When ROE is far higher than cost of equity capital, book value is not very helpful in determining a valuation.

[dydx]

When the tide is out, you can see who is swimming naked! Vicom is one of those rare stocks which defy the law of gravity!

[violinist]

Against a market which fell more than one percent, Vicom closed at all time high!

[dydx]

Vicom celebrated its 30th Anniversary last Saturday (22Jan11), and both Chairman Lim Jit Poh and CEO Heng Chye Kiou delivered speeches which traced the development of the company and evolution of the businesses over the years.....
http://info.sgx.com/webcoranncatth.nsf/V...F0033D014/$file/Chairman.pdf?openelement [Lim Jit Poh's speech]
http://info.sgx.com/webcoranncatth.nsf/V...F0033D014/$file/CEO.pdf?openelement [Heng Chye Kiou's speech]

Can Vicom's businesses last for another 30 years? IMHO, highly likely!

[yeokiwi]

ah... now I know why VICOM's share price was going up recently.
It seems that some investors are speculating a special 30th anniversary dividend?