Friday, April 27, 2012


VICOM's AGM is pretty boring unlike all the excitements I see from the newspaper and food-snatching is not very common there. There's quite a number of long-term shareholders present and I think it is good to have though some might complain this will make VICOM more illiquid. As it's my first AGM, I am more concerned about understanding the AGM's procedure and etiquette then finding out more about the company. After the formal AGM is over, it's the buffet cum meet up with management time. I realise that it is quite important to be able to recognise faces of the key management if it is your first time attending the AGM. While it may be boring, the trip proves to be rather fruitful.

Here's some of the key points gleaned from the trip:

Financial Statement
  • Someone queried about the higher receivables, Chairman Lim says there's no bad debt so far.
  • With the completion of SETSCO HQ, capex for the year will drop to normal (the norm from 2004 to 2009 is FCF/Net Profit of 100-120%). No further detail is provided as to acquisition or higher dividend plan though they say that as shareholder themselves they will also want to have higher dividend.
  • The parent company provided $2.6m in sales to VICOM, of which 2/3 comes from taxi inspection. (A new trick that I learn - check the parent company's annual report for inter-segment sales

Vehicle Inspection
  • They have no received any concrete details as regard to the government's adoption of Euro V in 2014. (Not sure if it is because they are not allowed to)
  • Comfort obviously send their buses and taxis to VICOM for inspection.
  • When queried about the proportion of inspection of private cars to overall inspection figure, they say the data is sensitive and thus they cannot reveal it. However, I believe that the data can easily be retrieved through finding the right combination of statistics from LTA. (I am not going to reveal the combination, that's for you to find out)

  • The wild card in Middle East JV has been called off. Mr Heng finds that they are not too comfortable operating in the region and decided to pull out of it.
  • SETSCO without the vehicle inspection business is the number 3 in Singapore. The largest 2 are SGS and TUV SUD with revenue of $60 million + as compared to SETSCO's $55m. 
  • The management admits that SETSCO is operating in an open market unlike the vehicle inspection business. So long as one can get the equipment, skilled labour and accreditation, they will be able to provide testing services.
  • Regarding the recent tussle between HSA and the medical community over medical device, SETSCO has been trying to get a slice of the pie. However, it is up to the government to decide if they want to allow SETSCO to do it.

The most important part of AGM is still to get a feel of the management team, and I am lucky to be able to interact with the current CEO Mr Heng and soon-to-be CEO Mr Sim Wing Yew.

  • The reason why Mr Heng sells part of his shares earlier on is as all his savings are in VICOM's shares. He will need some money now that he is retiring and to pay up loans, some of which has been used to exercise the option.
  • As for Mr Sim, this is his career and he still has 4 kids to support, thus he reassures us that he will also want to grow the top and bottom line. He is still trying to learn as quickly as possible and at the same time he is also teaching his new successor in Comfort Engineering. (which is he will not take dual CEO roles)
  • Mr Sim says that he will be going for evolution and not revolution when he takes over.
  • As for the growing cash balance, they say it is good to have excess cash as you will never know when you will need it. Neither do they want to overpay for acquisition like what TUV SUD offers for PSB. (Seemed to be $120m for 3-5m in profit).
  • Most importantly, they believe that a downturn will eventually occur in the long run and the right opportunity will surface (sound like the fat pitch theory). Mr Heng says he will rather pay with cash than to pay with credit cards for it and Mr Sim shares the same view. This was what happened in 2003 when they acquired SETSCO from Keppel Corp and they only need to borrow a bit of money for it.
  • One of the shareholders who works as a head-hunter, recounts how he fails to poach SETSCO's high quality staff with a 30-40% increment in salary. Mr Sim or Mr Heng says that he always tells his staffs that while he will not pay them the highest salary, they will be guaranteed a stable income and job even during recession. He says that the equipment is not a barrier to entry as anyone with the money can buy them, but it is these skilled workers that are their biggest assets.
  • Mr Sim mentions that the report of segmental revenue and profit is a disadvantage to the company, thus they cannot disclose more about SETSCO's other segments. For e.g. if competitors know that their margin is 20%, then they can compete by undercutting the margin to 17%.

Therefore, VICOM's management holds a rather conservative view though the results of the new leadership can only be assessed few years later. For now, let's wait for the FY 2012 Q1 result coming out on 10th of May as well as the dividend to be paid on the 14th of May. Using the latest figure, it will be no problem for the vehicle inspection business to show a 5-10% growth in profit in Q1.

I can't wait to attend another 3 more AGMs this coming July


  1. Hi thanks for the write-up, clear and concise! I wasn't able to attend VICOM as I was attending Kingsmen. The problem of not being able to be in two places at the same time! :P

    It would seem that growth would mainly come from Singapore, as they had abandoned their middle east associate. Interestingly, I was surprised to hear that they are building up their cash hoard to take advantage of potential M&A; had thought the space was quite saturated and they would not have much more room for growth. But acquisitive growth is good as long as it complements the current business and there are synergies in terms of knowledge, staff deployment and functionality and also economies of scale in providing services (e.g. same asset used for multiple purposes).

    So I guess if a downturn does come along in the near future, VICOM will be ready to swoop! Good to know this, and with the slow growth in the business and copious amounts of FCF, perhaps shareholders like you and me can look forward to better dividends over time? Haha

  2. Indeed, I am worried about possible crashes in July.

    Not exactly that they are building cash hoard as they have a specific target for acquisition, but that they believe it is good to have some cash to rely on during a crisis where potential acquisition target might surface.

    As for SETSCO's growth, customer satisfaction is more emphasized. He gives the example of someone bringing an iron to SETSCO for test which will only bring about little revenue. They are not interested in just that piece of iron, but the whole range of products that this client can potentially bring to SETSCO for testing.

    Personally, I believe that growth can be maintained for this financial year though 2013 and 2014 might be slightly murky for now.

  3. Well, the future is never clear as they say, and if there was absolute clarity then you'd end up "paying a high price for a cheery consensus" as Buffett calls it. So as investors we have to endure and live with uncertainty all the time, and place our faith and trust in Management to deliver the results. As FY 2012 progresses, we can get an idea of how well the business is holding up and the direction it is moving to secure growth, and whether there are said opportunities to capture more slices of the pie(s).

    As you said about SETSCO, it's the entire supply chain which VICOM is trying to capture, and not just rely on ad-hoc revenues which are inconsistent (and hence unreliable). To do that, they need certifications and I assume Management is focusing more on building this division rather than the stable (but low growth) vehicle inspection, which should act more as a cash cow.

  4. Are you really 20 years old? I am quite close to your age too. Do you invest in the HK stock market?

    1. I am 21 to be in a few months time. I used to think of investing overseas, but currently I see plenty of opportunities in Singapore. I have a 1st tier watchlist of 20 companies and another 30 companies in my 2nd tier watchlist, there's enough opportunity with my current asset size.

      you can check out, he is vested in HK exchange too

  5. This is still me, I invest in HK and a little bit in Australia, because these are the places I have bank accounts. I know that the HK market fluctuates very much, which is very good for value investors. This city is pretty much a highly speculative city. I am not sure if the Singaporean market behaves similarly. Are you related to in anyway? Come and take a look at my blog when you have time.

    1. I thought you are a Singaporean based in Singapore...

      it does make sense to invest in where your savings are.

      Singapore market's turnover is relatively lower as compared to many other countries like Hong Kong. In term of retail participation rate, the figure is 11% for Singapore as compared to 37% in Hong Kong.

      thevaluethought is a Singaporean student around 20+ too, he often looks at hong kong market.

  6. Dear Sir,

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