Saturday, January 14, 2012

VICOM - Part 4 (Conclusion)

The following table is the summary of all that have been discusses thus far:

Financial Statement Analysis

Positive Signs

Negative Signs

Average of 15% profit growth for the past 6 years

Profit Margin and Net Profit Margin not expected to increase further.

Net Profit Margin of 26.6%

Average ROE of more than 20% for the past 6 years

Net Cash, No Debt

FCF/Net Profit of at least 75%


Health Dividend Payout of 60%

Vehicle Inspection

Positive Signs

Negative Signs

Further tightening of COE supply will jack up prices and thus people are likely to hold on to their car longer

Vehicle growth to be stunted until 2014 before a review of the policy though the vehicle population growth will still remain positive

Such an impact has not been fully realized as monthly trend still points towards further aging of car population

Such impact is likely to be fully realized by the end of 2013

Closure of an important inspection centre in Ayer Rajah on Aug 2011 by STAI

While the Ayer Rajah centre will not be reopened again, no one knows if STAI will open another elsewhere. However, it will take $10 million and at least a year to open a new centre

The only one in the region to have a Vehicle Emission Testing Laboratory. VETL costs $4.7 million and VICOM was lucky to have been granted $2.3 million in fund. High cost might limit number of VETL being set up

Parallel import is at its lowest point currently

Adoption of Euro V std by 2014 will lead to further regulation of vehicle emission

A long term trend of more diesel cars on the road with the government doing a test trial on the impact of DPF on diesel vehicle

For each increase in diesel car, it will take another 2 years before the increase in revenue will be realized


Now, what is a fair value and target price of VICOM that i should be looking at. Valuation is something that is extremely tricky and I believe it to be much more of an art than a science. I will not be using DCF as I think that I am inadequately trained to do such a calculation yet. For valuation I will use expected earnings for 2011 given that 2011 FY has passed and the annual report is just 1 month away.

At $3.61 where I initiated my coverage, VICOM is trading at a P/E of 13 which is pretty high. However, if we take into account VICOM's net cash position, EV/EBIDTA is in fact only 7.87.
Even if we count in ITDA, EV/Earning will be 10.5.

Here's a question for everybody, will you choose a stock trading at PE of 10.5 but a EV/Earning of 13 or will you choose a stock trading at PE of 13 but a EV/Earning of 10.5?

No matter what your answer is, I still believe that VICOM is a fair buy given its high profit margin, ROE, high FCF, low CAPEX and a sound business model. While the current value might be on the high side, it is definitely undemanding. What's more a final dividend will be declared in a month time and distributed in May.

While I initiated the coverage at $3.61, I got it at an average price of $3.40. The reason why I choose to initiate it at $3.61 is because it was the price of VICOM on that day. Initiating a coverage at $3.40 will in fact be giving me a 3 months hind side, but this is not to say that $3.61 is not a fair value to buy in.


  1. Well done on the analysis of VICOM, and your entry price. Now the question is "when to take profit?" To sell or not, and at what price, is as important to the profit of an investor as the decision to buy.

    1. Hi, I will appreciate if you leave a name so that it will be easier for me to refer to the next time instead of just an anonymous. any moniker will also do:)

      I am comfortable at the price of VICOM at the current level as I believe that we are likely to continue seeing good growth coming from both VICOM and SETSCO. Mr Lui has not made significant changes to his vehicle ownership policy and the restriction will help VICOM to reach a peak in the vehicle inspection business. From what I see of the vehicle age distribution data, the ageing trend has not reached its peak yet.

      As for SETSCO, it has continue to grow through expanding its range of services. I am rather confident of this segment after having been to the agm and understood more about it.

      So what price will I sell? No way am I going to sell if it is at the range of $4 and $5 on the assumption that the business fundamental remains the same. Anything above $5 and I will have to look back at the business fundamental to see if it is still worth holding on. Other factors like if there's any better business at a cheaper price around will also be taken into consideration.

      Personally, I just hope that the share price will continue to appreciate at the rate of growth of its bottom line. 8-12% growth in bottom line should not be a problem for the current FY.

  2. Hello!

    Can I know where you found out the cost of entry, information on competitors for Vicom and Setsco? etc?

    Many Thanks

    1. For vicom, it is pretty easy since STAI is its only competitor. For Setsco, I search the singapore accreditation council for information since anyone that want to operate in the sector must be accreditated

  3. Hi,

    Chanced upon your blog. Just want to understand, whats the rationale behind a EV/E multiple?


    1. the use of enterprise value will punish firms with debt and reward firms in net cash position. Enterprise value is Market Cap -Cash + Debt

  4. enterprise value is based on total capital to the company, it doesn't distinguish between debt and equity, whereas net profit makes a very clear distinction between the two.

    so the two are not comparable to begin with.

    why is it bad to be using debt? its usually cheaper than equity after all. as a equity holder, if a company is actively pursuing growth using sensible debt, it would be more attractive in the long term than one using equity to pursue growth isn't it?

    the use of such multiples are simple methods of comparison, which provides good and easy benchmarking, but looks only at a point in time rather than consider future potential.

    1. i agree that debt is not necessarily bad given that the cost of debt is often much lower than the cost of equity. However, assuming all other things equal, will you pay the same price for 2 different companies A and B, where A is flushed with cash and B is burdened by debt? The problem with debt is that leverage is often so attractive to companies that they know no limit on the appropriate leverage and to pursue growth in area which produces low return on capital.

      Multiples are simple but i don;t think that they will differ much from more sophisticated valuation methods like dcf and ddm. Having a low discount rate or aggressive growth forecast is equivalent to attributing a higher multiple to the company