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

[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

Many many years ago, I invested in VICOM because it had high FCF generation capability and then did its part to provide ammunition for CDG's participation in the ride hailing war.

Unfortunately, when I had also seen the turn of the capital cycle for VICOM, the "owner mentality dogma" was so strong that I did not act accordingly. This "great investment with really low return of brain damage" became just a "decent investment considering the amount of brain damage" when I finally decided to give up been a VICOM owner. I would also have to give up the satisfaction from seeing vicom stickers on the back of car windscreens.

Half of those proceeds were invested into YZJFH and on hindsight, giving up the satisfaction of seeing those stickers on the back on cars, had been liberating as much as monetarily satisfying.

We should invest with an owner mentality, no questions about that. But that doesn't mean we fore sake the flexibility bestowed upon us as investors. I invest and I do a small business as well. The business side of me is really envious of the investor side of me for the flexibility, while the investor side of me is really envious of the business side of me for that fortitude to appreciate how real business is just beyond numbers/figures on a spreadsheet.

RESPONSES TO QUESTIONS FROM SHAREHOLDERS IN RELATION TO THE COMPANY’S 44th ANNUAL GENERAL MEETING

Several years ago, the Company had a significant accumulated surplus. The Board at that time decided to progressively return to shareholders surplus that was not earmarked for specific use. The return of this surplus was completed four years ago.

Two years ago, VICOM had to revise its dividend policy to a lower payout of at least 70% of net profit attributable to shareholders, to meet cash flow needs, such as the ongoing development of the new Jalan Papan facility. Consequently, VICOM’s share price appears to have tracked the lower level of dividends.

Therefore, in answer to the question, there is no easy way to bolster the share price even if we desire to do so. We could increase dividends beyond what the bottom-line profit allows, but this would put the Company into a financially unsustainable situation, to the detriment of future returns. Instead, the Company will strive to keep improving its profitability, and thus enhance the share price, assuming business sentiment and the economic situation remain stable. VICOM will continue to review its cash flow needs, and pay out to shareholders cash surpluses that are not required for business expansion, as with past practice.

https://links.sgx.com/FileOpen/VICOM%20-...eID=841412

[weijian]

After churning out some well written articles, Corporate Monitor's latest writeup on VICOM is the first report that has largely disappointed.

For a start, the executive summary states that vehicle inspection fees are regulated by the government when in fact, they are not. It was corrected in the report itself and so therefore there is inconsistency between the executive summary and actual details.

The report argues from the perspective of an investor to improve granularity to the segmental reporting, largely to split out between vehicular and non-vehicular inspection. But does not put much weightage from a business perspective. Transparency is good until when it isn't. There is also some amount of SETSCO "bashing" - If one compares SETSCO to Vicom inspection center business, that will be a natural conclusion. The matter of fact is the majority of businesses, if been compared to Vicom inspection center business in terms of margin, will have not too indifferent conclusions as well.

10 directors is definitely not too little for a ~500-600mil cap company.

EXECUTIVE SUMMARY

VICOM Ltd. (“VICOM”) is one such company. It is a pioneer in Singapore’s Vehicle Inspection industry and has close to 73% market share, in an industry whose demand is guaranteed by government regulation that all vehicles have to be inspected at regular intervals. There is no competition because there is only one other vehicle inspection company and fee is set by the government. On the flip side, Singapore’s strict policy on vehicle population also means that the demand has minimal growth.

VICOM’s strategy is to diversify and grow via non-vehicle testing business, which is housed under SETSCO Services Pte. Ltd. (“SETSCO”), acquired in 2003. The strategy was reiterated in its 2022 annual report. However, VICOM refused to provide segment disclosure. Our analysis in this report on this segment is based on basic but incomplete financial information on SETSCO for 2022 to 2024 that we have obtained from ACRA. We also assumed that there are no significant intercompany transactions between the nonvehicle testing business and the rest of the business.

In other words, for a business that contributed more than 50% of revenue, non-vehicle testing contributed only 16% of net profit, and the share continues to decline. The stable original business of vehicle inspection is still contributing more than 80% of profit. This begs the question of why such growth strategy continues to be pursued. There are other corporate governance issues related to such strategy which we will return to in later sections.

VICOM’s corporate finance decisions are also diluting shareholder value. Debt is a very legitimate way of financing business, especially for a business that is stable and very cashflow generative, which VICOM’s vehicle inspection business clearly is. However, VICOM’s board has decided to stay debt free, even for a (essentially real estate) project to develop a new site at Jalan Papan. In addition to replacing the vehicle inspection centre, the new site will also house expanded non-vehicle testing facilities.

VICOM also has a bloated board, which it justifies as needed expertise for the non-vehicle testing businesses. Again, we are not convinced, as 3 of the 4 directors who are purported to have such expertise are academics without business experience.

It is regrettable that VICOM started with a great vehicle inspection business, but dilutes shareholder value by pursuing growth in non-vehicle testing business. VICOM’s decision, against financial reporting rules, to not provide segment financials, also reduce the company’s corporate governance standing.

https://corporate-monitor.org/vicom-ltd-...s-is-more/