Wednesday, January 4, 2012

Initiation of Coverage on VICOM at $3.61 - Part 1 (Financial Statement Analysis)

Hi all, this will be my first ever analysis report and pardon me if it may be slightly disorganised or even erroneous. And this first company that i have chosen is none other than VICOM, my favourite stock of all. For all my future analysis reports, financial statements analysis will always be the first as i believe that financial statements will never lie to us about the actual state of a company and will be able to provide unexpected valuable insights (the prerequisite will be that it is not being manipulated).

Fig 1 Income Statement
Fig 2 Income Statement Analysis

A look at the income statement shows a company that has managed to grow its profit yearly since 2004 at a average rate of about 15%. This trend also applies for its Earning per Share. Vicom also has very high operating and net profit margin of more than 25%. So does its Return on Asset and Return on Equity with a figure of around 20%. And one more very positive sign is that both its profit margin and ROE has been increasing constantly.

However, a closer look at Fig 2 shows something strange. Despite its average 15% increase in profit, actual rise in revenue has in fact been averaging only around 10%. 2007 and 2009 are 2 of the years where the anamoly actually amplified. This is the cost control effect that i have talked about in "". From the data, other than 2005, rise in operating expense has always been slower than the rise in revenue and is in fact a key driver of the profit growth. So now, let's examine the operating expense to gather some clues about its underlying economic.

Fig 3 Operating Expense Raw Data
Fig 4 Operating Expense Analysis

From Fig 4, one can see that Staff costs and Depreciation expense occupy 72% of the total operating expense. And other than 2005, increase in Staff Costs and Depreciation Expense has always been lower than the increase in Revenue. It is easy to understand why depreciation expense is able to increase at a much slower pace than revenue increase sine depreciation is a rather fixed cost. But this also shows that Vicom does not really need to increase Capex to generate extra revenue. As for staff costs, it is a good thing that it occupy 60% of the operating expense as it is in fact one of the easiest and fastest cost to be controlled simple by not hiring more than what is needed to handle the increase in revenue.

Fig 5 Balance Sheet (Asset)
Fig 6 Balance Sheet (Liabilities and Equity)

The balance sheet for Vicom is very easy to analyse as there is no long-term debt and the short-term liabilities can be repaid with its profit. Its cash has been growing and as of end of 2010 it stood at 49m. There is no point in applying any of the financial ratio in this case as it will probably be as useful as knowing that it has 49m cash and no long-term debt.
While some may comment that it is trading at a high P/B ratio of more than 3, i believe that P/B is rather useless too in this case. With a ROE of 20%, the stock must then be trading at a P/E ratio of 5 to get a P/B ratio of 1.

ROE = Profit/ Book Value
0.20= Profit/ Book Value
Book Value = 5 * Profit

Fig 7 Cashflow Statement

Fig 8 Cashflow Statement Analysis


For analysis of free cashflow, i will use FCF/Net Profit to determine how much free cashflow can be generated from the net profit. From Fig 8, we know that Vicom is able to generate more than 100% free cashflow from its net profit and this is a very positive sign. However, we can see that 2006, 2009 and 2010 produce a lower FCF/Net Profit percentage. From Fig 7, average capex is around 4 million dollar other than the 3 years i mentioned. In 2006, Vicom spent 5 million dollar on CDST. In 2009, Vicom built a 4.7m Vehicle Emission Testing Lab of which 2.3m is grant from LTA. In both instances, we can discount them as a one-off charge that stem from LTA's new regulations which in fact add additional source of revenue. In 2010, there is a significant increase in CAPEX. Fig 9 tells us that there was a 8.8m worth of capital work-in-progress. This is very likely to be the new building and laboratory built at Teban garden compound.

Through deducting these one-off items, Vicom's FCF has always been around 100% of the net profit for the past 6 years. While it might not be conservative to discount these as one-off capex, it is unlikely that Vicom will have such significant increase in capex in the future given that it has just finished building its HQ and that Vehicle Emission Testing Laboratory is able to test standard up to Euro 5 (This will be discusses in Part 2B). Even with additional capex, Vicom can still easily issue dividend at 60% of its net profit. Though this might in fact increase if the management feels that they are unable to put the cash to better use.

From the financial statement analysis, we are able to tell of the great fundamental of the business. Ever increasing profit margin, ROE, no debt and with great FCF, it is hard to find a similar stock.

For part 2, I will focus on Vicom's vehicle inspection business which contribute around 45% of its net profit and how LTA's policy on vehicle population growth will affect its business.

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