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.