Miscellaneous
They have a new side business – emission testing. Please see below for extract from company’s website.
VICOM Emission Test Laboratory (VETL) is a state-of-the-art laboratory dedicated to fuel emission and fuel economy testing. Set up by VICOM, VETL provides a comprehensive range of testing services pertaining to vehicle emissions and fuel efficiency.
As the first of its kind in South-east Asia, VETL offers the foremost in vehicle emission testing technology for cars, motorcycles and commercial vehicles. The facility has the capability to carry out testing up to Euro 5+ and other international standards. We provide an exhaustive range of testing needs for our customers. Also, with nearly 30 years of establishment in the vehicle inspection market, we provide our customers with an unmatched track record in reliability and professionalism.
2010年7月28日星期三
VICOM - Part VII
Conclusion
The company is the clear market leader in the vehicle inspection business with a market share that has consistently been >70%. The business is driven by the LT secular trend of a growing vehicle population and the inevitable need to inspect your vehicle. This provides the business with a stable growth characteristic.
It has also displayed a clear track record in growing the non-vehicle testing business independent of the economic environment. The expansion of current facilities is a positive. Moreover, the presence of overseas facilities makes me believe that it might eventually grow to be a regional powerhouse in non-vehicular testing. But that will take a really long period (think 10 years).
Hence, at current valuations, this is a fair price to pay for a good quality business that has consistently achieve top and bottom line growth with a >15% ROE while paying out half of earnings in dividends. In fact, I note that if you have invested in 2005, you will have seen a 100% in share price (it hardly dropped in the market downturn) and have received another 33% worth of dividends. So you will have seen a 20+ return in your earnings
The company is the clear market leader in the vehicle inspection business with a market share that has consistently been >70%. The business is driven by the LT secular trend of a growing vehicle population and the inevitable need to inspect your vehicle. This provides the business with a stable growth characteristic.
It has also displayed a clear track record in growing the non-vehicle testing business independent of the economic environment. The expansion of current facilities is a positive. Moreover, the presence of overseas facilities makes me believe that it might eventually grow to be a regional powerhouse in non-vehicular testing. But that will take a really long period (think 10 years).
Hence, at current valuations, this is a fair price to pay for a good quality business that has consistently achieve top and bottom line growth with a >15% ROE while paying out half of earnings in dividends. In fact, I note that if you have invested in 2005, you will have seen a 100% in share price (it hardly dropped in the market downturn) and have received another 33% worth of dividends. So you will have seen a 20+ return in your earnings
VICOM - Part VI
Risks
Regulations
Changes in regulations that affect growth of vehicular population and more importantly, inspection requirements can impact earnings significantly. Regulations will also affect the non-vehicular testing business as less stringent requirements will lead to lower level of testing needed.
This is a huge underlying risk of this investment. In fact, so much so that I will call this a regulatory play on sustained need to test more things so as to increase safety and quality.
Execution risk
Growth in non-vehicular testing may slow if company is unable to continue expanding scope of items tested, acquire new business and maintain/grow margins.
Liquidity
The stock is tightly held by ComfortDelgro and has a low daily volume traded. So you may not always be able to exit at the current quoted price (liquidity discount). Neither are you able to buy a huge amount at any point in time. Hence, you CANNOT place a huge amount in this stock.
Things Which Are Still Unclear – ALSO A RISK!
What are drivers of non-vehicle testing business? / What’s the huge other payables in the balance sheet?/ Sustainable Margins?
I note that the only information I have are from the annual report and the company’s website. Hence, there might be blind spots and faulty conclusions reached. For instance, I had to come up with the drivers of non-vehicle testing business. With no confirmation from management of my understanding, I could very well have got it wrong.
I also could not identify what constitute the huge “other payables” in the balance sheet. It is unclear why other payables are consistently more than trade payables.
Neither could I confidently ascertain the growth and sustainability of the margins. I suspect operating leverage is at play and maybe (just maybe) improved pricing power and billing for finished work done for the integrated resorts. But I note that all these are merely my suspicions.
Why cash not given out? Why hold so much cash?
Why give out only 50% when cash generation capabilities have continued to increase? I propose the following hypotheses:
1) Earning figures are fake so they can't give out as much
a. Evidence 1 – margins jump too crazily and is faked
b. Counter Evidence 1 – Why would they lie when they are not covered by any analyst? Maybe ComfortDelgro wants wants to boost their earnings and thus pressured Vicom to fake the earnings. However, Vicom’s contribution to their earnings is insignificant compared to their overall earnings (S$220m in 2009). Hence, ComfortDelgro has little incentive to manage earnings and would desire accurate reporting instead. In fact, I propose the notion that ComfortDelgro will want to see more cash being sent back up to them instead.
2) Margins at this level are not sustainable so current cash generation capabilities is unsustainable. Hence, want to manage expectations by not giving out too much dividend, so that they can show DPS growth next year
3) They need the money to expand the non-vehicle testing biz - like building a new extension and to buy new equipment.
I believe that hypothesis 2 and 3 are more likely than 1.
I note that they don't pay out all when they face certain uncertainties and when they want to grow the business by buying eqpt (e.g. 2005 – Idacs business slowdown, 2008 – recession, 2009 – construction for new extension) But then, the current payout ratio is low compared to average of past 10 years where they pay at least 60% of earnings. With sufficient money (30+m of cash) set aside for the construction, I believe there is a good chance that they might not need to retain so much more cash. Hence, the payout ratio is likely to increase.
There is nothing wrong with giving out less if they can use the $ more productively and return 20% ROE on the money retained. In fact, if they can grow the money at 20% IRR, I will rather that they keep it because I sure can’t find many 20% IRR opportunities myself!
Regulations
Changes in regulations that affect growth of vehicular population and more importantly, inspection requirements can impact earnings significantly. Regulations will also affect the non-vehicular testing business as less stringent requirements will lead to lower level of testing needed.
This is a huge underlying risk of this investment. In fact, so much so that I will call this a regulatory play on sustained need to test more things so as to increase safety and quality.
Execution risk
Growth in non-vehicular testing may slow if company is unable to continue expanding scope of items tested, acquire new business and maintain/grow margins.
Liquidity
The stock is tightly held by ComfortDelgro and has a low daily volume traded. So you may not always be able to exit at the current quoted price (liquidity discount). Neither are you able to buy a huge amount at any point in time. Hence, you CANNOT place a huge amount in this stock.
Things Which Are Still Unclear – ALSO A RISK!
What are drivers of non-vehicle testing business? / What’s the huge other payables in the balance sheet?/ Sustainable Margins?
I note that the only information I have are from the annual report and the company’s website. Hence, there might be blind spots and faulty conclusions reached. For instance, I had to come up with the drivers of non-vehicle testing business. With no confirmation from management of my understanding, I could very well have got it wrong.
I also could not identify what constitute the huge “other payables” in the balance sheet. It is unclear why other payables are consistently more than trade payables.
Neither could I confidently ascertain the growth and sustainability of the margins. I suspect operating leverage is at play and maybe (just maybe) improved pricing power and billing for finished work done for the integrated resorts. But I note that all these are merely my suspicions.
Why cash not given out? Why hold so much cash?
Why give out only 50% when cash generation capabilities have continued to increase? I propose the following hypotheses:
1) Earning figures are fake so they can't give out as much
a. Evidence 1 – margins jump too crazily and is faked
b. Counter Evidence 1 – Why would they lie when they are not covered by any analyst? Maybe ComfortDelgro wants wants to boost their earnings and thus pressured Vicom to fake the earnings. However, Vicom’s contribution to their earnings is insignificant compared to their overall earnings (S$220m in 2009). Hence, ComfortDelgro has little incentive to manage earnings and would desire accurate reporting instead. In fact, I propose the notion that ComfortDelgro will want to see more cash being sent back up to them instead.
2) Margins at this level are not sustainable so current cash generation capabilities is unsustainable. Hence, want to manage expectations by not giving out too much dividend, so that they can show DPS growth next year
3) They need the money to expand the non-vehicle testing biz - like building a new extension and to buy new equipment.
I believe that hypothesis 2 and 3 are more likely than 1.
I note that they don't pay out all when they face certain uncertainties and when they want to grow the business by buying eqpt (e.g. 2005 – Idacs business slowdown, 2008 – recession, 2009 – construction for new extension) But then, the current payout ratio is low compared to average of past 10 years where they pay at least 60% of earnings. With sufficient money (30+m of cash) set aside for the construction, I believe there is a good chance that they might not need to retain so much more cash. Hence, the payout ratio is likely to increase.
There is nothing wrong with giving out less if they can use the $ more productively and return 20% ROE on the money retained. In fact, if they can grow the money at 20% IRR, I will rather that they keep it because I sure can’t find many 20% IRR opportunities myself!
VICOM - Part V
Valuations
Assuming margins shrink to 24% (because the sharp rise in margins may not be sustainable) and sales grow at 7% (which is not unreasonable given they have grown faster previously), at S$2.83, you are buying at ~12x P/E, which is 8.3 E/P. FCF is ~11x P/FCF and is a FCF yield of 8.9%. Dividend yield at the historical 60% payout ratio gives you a decent 5% yield.
This is my “prudent” case. I believe these assumptions are prudent and won’t fall too far short of it. And thus even if I get it wrong, the results of the company, supported by the previously mentioned growth drivers, will grow at a fast enough clip to erase any folly of mine on the valuation level which I am entering into.
Assuming margins shrink to 24% (because the sharp rise in margins may not be sustainable) and sales grow at 7% (which is not unreasonable given they have grown faster previously), at S$2.83, you are buying at ~12x P/E, which is 8.3 E/P. FCF is ~11x P/FCF and is a FCF yield of 8.9%. Dividend yield at the historical 60% payout ratio gives you a decent 5% yield.
This is my “prudent” case. I believe these assumptions are prudent and won’t fall too far short of it. And thus even if I get it wrong, the results of the company, supported by the previously mentioned growth drivers, will grow at a fast enough clip to erase any folly of mine on the valuation level which I am entering into.
I note that dividend payout prior to 2005 is ~60%.VICOM - Part IV
Financial Analysis
Using a Dupont analysis, ROE has been increasing across time, driven mainly by net profit margin expansion. Net profit margin expansion was driven mainly by operating margin expansion and partly by lower tax rates. Leverage is nil because no debt is employed. Asset turnover fell largely because of increased holding of cash.
Growth in 2009 has been propelled by a sharp increase in margins. One suspect if it is sustainable, though it is hard to establish a conclusion either ways without additional information.
Using a Dupont analysis, ROE has been increasing across time, driven mainly by net profit margin expansion. Net profit margin expansion was driven mainly by operating margin expansion and partly by lower tax rates. Leverage is nil because no debt is employed. Asset turnover fell largely because of increased holding of cash.
Growth in 2009 has been propelled by a sharp increase in margins. One suspect if it is sustainable, though it is hard to establish a conclusion either ways without additional information.
VICOM - Part III
Growth Analysis
Growth is going to come more from the non-vehicle testing, where margins are lower than vehicle inspection. Growth will depend on both top line growth and margins expansion. Top line growth is likely to continue, though one wonders how much more can margins possibly grow at this rate. Arithmetically, it is impossible because if it continues like this, its margins will hit 100% in 15 years!
VICOM - Part II
Segmental Analysis
VICOM and JIC vehicle inspection centres
It is a statutory requirement to inspect your vehicle periodically. Hence, demand will always be there. The risk however is that regulations become less stringent (e.g. # of inspections reduces) and this will have a significant impact on the business. This was what happened in the vehicle assessment business.
Vehicle Age Inspection Requirement
Motorcycles & Scooters > 3 years Once a year
Motorcars 3 - 10 years Once in 2 years
Motorcars > 10 years Once a year
The business is driven by 1 long term secular trend and 1 cyclical trend. The secular trend is the increasing number of cars on the road. Have you not noticed more cars on the road than 5 years ago? The number of cars is driven by new COEs issued (+) and vehicle deregistration (-). A lower vehicle deregistration tends to be accompanied by a lower number of new COEs because the government takes an active effort to control the growth of the vehicle population (ASSUMPTION). This is what is happening now and the increase in older vehicles will benefit VICOM in the short to intermediate term.
A lower vehicle deregistration benefits the company immediately because the number of old cars on the road stays high but it will dis-benefit them in the long term because the lower number of new cars now, means a lower growth in number of old cars in the future. This relationship dictates the cyclical nature of growth. Note that this is true if the assumption above is true. It could very well be that we see both a higher number of new COEs and lower vehicle deregistration than historically.
VICOM Assessment Centre (VAC)
IN 2005, it was no longer compulsory to make accident reports at the Independent Damage Assessment Centre (IDAC) which VICOM runs. This immediately saw business shrink by 80% and even now, the business borders on the line of unprofitability. This highlights the regulatory risk which I mentioned above.
As it stands, this business segment is insignificant in terms of bottom line contribution.
SETSCO
The company has branches across Singapore (Teban Gardens, Changi), Malaysia (Selangor) and Vietnam (Ho Chi Minh).
According to the FY09 annual report, the company expects to expand its scope of work to new areas like digital radiography, phased array ultrasonic testing and thermal conductivity testing. The company is also planning to test new products such as sanitary ware, electrical, glass and drinking water treatment appliances.
To meet the growing demand for non-vehicle testing services, Setsco has installed both a modern universal test machine that is able to test stronger materials, and a sophisticated metal analyser that can test metals at a faster turnaround time.
This year (2010), construction on an additional laboratory and office block at Setsco’s current premises in Teban Gardens will begin. It is expected to be completed in the first half of 2011.
This is the key driver for VICOM’s business. Things always need to be tested so growth is partly independent of economic growth.
Growing business – can expand scope to test an increasing variety of things. Things always need to be tested So growth can be independent of economy because
Testing volume = ∑i (# of unique items being test i * frequency of testing/item i * # of clients for item i )
The # of unique is driven by expanding in business scope to other areas (endogenous/controllable by company). Frequency is more of an exogenous item and driven by economic activity (e.g. construction biz)/regulations for testing. The # of clients is also within the company’s control because the company can go acquire more clients and increase market share for the testing of a particular item.
In terms of said endogenous factors, the company has been trying to achieve both and has proven to be quite successful in growing the business. This can be seen from the fact that top line growth of the segment has been strong (>10% p.a.) and they need to expand current facilities to meet demand.
In terms of exogenous factors, regulations can go either way – a wild card. But the trend has always been more testing because of quality and safety reasons (think melamine milk and lead in toys). Economic activity is definitely a factor but you are safeguarded by the fact that you are diversified across industries. Proof is that biz grew even in downturn (2008/09).
So overall, expect the business to continue experiencing top line growth. Bottom line growth will depends on sustainability of margins.
Rental Income
Should go up as rental rates pick up.
VICOM and JIC vehicle inspection centres
It is a statutory requirement to inspect your vehicle periodically. Hence, demand will always be there. The risk however is that regulations become less stringent (e.g. # of inspections reduces) and this will have a significant impact on the business. This was what happened in the vehicle assessment business.
Vehicle Age Inspection Requirement
Motorcycles & Scooters > 3 years Once a year
Motorcars 3 - 10 years Once in 2 years
Motorcars > 10 years Once a year
The business is driven by 1 long term secular trend and 1 cyclical trend. The secular trend is the increasing number of cars on the road. Have you not noticed more cars on the road than 5 years ago? The number of cars is driven by new COEs issued (+) and vehicle deregistration (-). A lower vehicle deregistration tends to be accompanied by a lower number of new COEs because the government takes an active effort to control the growth of the vehicle population (ASSUMPTION). This is what is happening now and the increase in older vehicles will benefit VICOM in the short to intermediate term.
A lower vehicle deregistration benefits the company immediately because the number of old cars on the road stays high but it will dis-benefit them in the long term because the lower number of new cars now, means a lower growth in number of old cars in the future. This relationship dictates the cyclical nature of growth. Note that this is true if the assumption above is true. It could very well be that we see both a higher number of new COEs and lower vehicle deregistration than historically.
VICOM Assessment Centre (VAC)
IN 2005, it was no longer compulsory to make accident reports at the Independent Damage Assessment Centre (IDAC) which VICOM runs. This immediately saw business shrink by 80% and even now, the business borders on the line of unprofitability. This highlights the regulatory risk which I mentioned above.
As it stands, this business segment is insignificant in terms of bottom line contribution.
SETSCO
The company has branches across Singapore (Teban Gardens, Changi), Malaysia (Selangor) and Vietnam (Ho Chi Minh).
According to the FY09 annual report, the company expects to expand its scope of work to new areas like digital radiography, phased array ultrasonic testing and thermal conductivity testing. The company is also planning to test new products such as sanitary ware, electrical, glass and drinking water treatment appliances.
To meet the growing demand for non-vehicle testing services, Setsco has installed both a modern universal test machine that is able to test stronger materials, and a sophisticated metal analyser that can test metals at a faster turnaround time.
This year (2010), construction on an additional laboratory and office block at Setsco’s current premises in Teban Gardens will begin. It is expected to be completed in the first half of 2011.
This is the key driver for VICOM’s business. Things always need to be tested so growth is partly independent of economic growth.
Growing business – can expand scope to test an increasing variety of things. Things always need to be tested So growth can be independent of economy because
Testing volume = ∑i (# of unique items being test i * frequency of testing/item i * # of clients for item i )
The # of unique is driven by expanding in business scope to other areas (endogenous/controllable by company). Frequency is more of an exogenous item and driven by economic activity (e.g. construction biz)/regulations for testing. The # of clients is also within the company’s control because the company can go acquire more clients and increase market share for the testing of a particular item.
In terms of said endogenous factors, the company has been trying to achieve both and has proven to be quite successful in growing the business. This can be seen from the fact that top line growth of the segment has been strong (>10% p.a.) and they need to expand current facilities to meet demand.
In terms of exogenous factors, regulations can go either way – a wild card. But the trend has always been more testing because of quality and safety reasons (think melamine milk and lead in toys). Economic activity is definitely a factor but you are safeguarded by the fact that you are diversified across industries. Proof is that biz grew even in downturn (2008/09).
So overall, expect the business to continue experiencing top line growth. Bottom line growth will depends on sustainability of margins.
Rental Income
Should go up as rental rates pick up.
VICOM - Part I
Have you been sending your car for inspection lately? If you have, you will probably have visited a facility run by the company that I am going to introduce shortly. Not only does the company provide good service for your car, it will perform a great service for your wallet too!
What is VICOM
VICOM Ltd was incorporated in 1981 and publicly listed on Singapore's stock exchange in 1995. The VICOM Group is a subsidiary of ComfortDelGro Corporation Limited.
Vicom owns 3 main business divisions:
VICOM and JIC vehicle inspection centres With over 300,000 vehicle checks conducted at our centres annually, and with car evaluations at 30,000 and counting, VICOM is the premier one-stop inspection service provider in Singapore. In 2009, it has 70% of the market share in Singapore.
VICOM Assessment Centre (VAC) provides a one-stop, post-accident service solution – towing services, car rentals, assistance in accident reporting, claims filing, repairs and safety checks through its three Independent Damage Assessment Centres (Idac), co-located within our VICOM inspection centres. VAC has also expanded its capabilities to include accident reconstruction using computer simulation and analysis, which assists in court litigation of disputed accident cases.
SETSCO forms VICOM’s non-vehicular inspection and testing arm. SETSCO provides testing, calibration, inspection, consultancy and training services to the
i) aerospace,
ii) marine and offshore,
iii) biotechnology,
iv) oil and petrochemical,
v) building construction and
vi) electronics manufacturing industries.
Its services include
i) quality assurance testing and evaluation of building materials,
ii) structural and chemical analysis,
iii) food and microbiological analysis,
iv) environmental monitoring, amongst others.
One of its recent developments is the setting up of SETSCO Aerospace Testing Centre (SATC) in November 2006. SATC provides a range of non-destructive testing of aircraft components. SETSCO’s advent into the aerospace industry has been duly validated, as demand has been strong with many top local and foreign companies utilising their services.
They also lease out parts of the buildings which they occupy and so rental income comprises a small part of their income (~5%). They also offer some miscellaneous services like consulting, motor insurance which form approximately 10% of 2009 income.
What is VICOM
VICOM Ltd was incorporated in 1981 and publicly listed on Singapore's stock exchange in 1995. The VICOM Group is a subsidiary of ComfortDelGro Corporation Limited.
Vicom owns 3 main business divisions:
VICOM and JIC vehicle inspection centres With over 300,000 vehicle checks conducted at our centres annually, and with car evaluations at 30,000 and counting, VICOM is the premier one-stop inspection service provider in Singapore. In 2009, it has 70% of the market share in Singapore.
VICOM Assessment Centre (VAC) provides a one-stop, post-accident service solution – towing services, car rentals, assistance in accident reporting, claims filing, repairs and safety checks through its three Independent Damage Assessment Centres (Idac), co-located within our VICOM inspection centres. VAC has also expanded its capabilities to include accident reconstruction using computer simulation and analysis, which assists in court litigation of disputed accident cases.
SETSCO forms VICOM’s non-vehicular inspection and testing arm. SETSCO provides testing, calibration, inspection, consultancy and training services to the
i) aerospace,
ii) marine and offshore,
iii) biotechnology,
iv) oil and petrochemical,
v) building construction and
vi) electronics manufacturing industries.
Its services include
i) quality assurance testing and evaluation of building materials,
ii) structural and chemical analysis,
iii) food and microbiological analysis,
iv) environmental monitoring, amongst others.
One of its recent developments is the setting up of SETSCO Aerospace Testing Centre (SATC) in November 2006. SATC provides a range of non-destructive testing of aircraft components. SETSCO’s advent into the aerospace industry has been duly validated, as demand has been strong with many top local and foreign companies utilising their services.
They also lease out parts of the buildings which they occupy and so rental income comprises a small part of their income (~5%). They also offer some miscellaneous services like consulting, motor insurance which form approximately 10% of 2009 income.
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