Sunday, April 15, 2012

VICOM - FY 2011 Review (Part 2 - Development of VICOM and SETSCO)

As I have promised, this is going to be an exciting post as it is full of new developments that have happened in the financial year. Firstly, lets start off with the vehicle inspections segment.

Figure 1 - Vehicle Inspection Segmental Result

The vehicle inspection business has been seeing double digit growth in profits for the past 7 years and has managed to increase revenue by 10.6% and EBIT by 11.25% this year. CAPEX for this segment is extremely light throughout the year with the exception in 2006 and 2010. 2006 was due to building of CDST facilities while 2010 was as a result of the construction of the new HQ at Teban Garden. The construction expense is allocated to SETSCO for FY 2011. As seen, CAPEX usually occupies at most 10% of the total EBIT for the vehicle inspection segment.

Figure 2 - Number of vehicles inspected

As I have earlier mentioned in VICOM - Part 2B, it is expected that VICOM's market share will increase by another 5%. In 2011, market share expanded by 1.6% to 72.1% which shows that the impact of the closure of Ayer Rajah inspection centre is significant. Given that it was closed in Mid-August, another increase of 3.2% to 75.6% is expected this coming year. Hence, 3.2/72.1= 4.4% rises in revenue from its gain in market share for 2012 is expected. 

Let's look at some of the developments this year that has an impact on the vehicle inspection industry at large. Budget 2011 has been a huge bonus for VICOM with an addition of 800 buses as well as incentives that level the competition between diesel car and petrol car. For the bus portion, it has been mentioned extensively here though the impact to the revenue is limited to perhaps 1%. 

                                                                         Figure 3 - Number of diesel cars

As for diesel car, the trend has been pretty encouraging and this is going to be what that will drive further future growth in vehicle inspection segment from 2014 onwards. As seen, the month on month increase has been pretty strong at 10% per month, as such by end of 2012 there should be at least 800 diesel cars on the road especially given that COE has been very high.

Another policy that many will have missed out will be LTA's tighter regulation in a bid to improve quality of taxi service. Under the scheme, minimum fleet size requirement to get a Taxi Operator License will be increased from 400 to 800 and all taxi companies other than Prime will need to have their TOL renewed by 2013. Based on the current fleet size, SMART and Yellow-Top will need to add around 600 taxis in total while Prime will be given the allowance to add 100 each year. Other than this 95% of passengers who successfully call book, the taxi need to arrive within 10 mins instead of 85% currently. For small taxi companies (less than 1000), the figure is 90% up from the current 65%. As such, the total taxi population is likely to increase further.

Regarding the general trend of vehicle inspection and government's policy, there is something which I wish to clarify. The OPTIMUM condition for VICOM to thrive will be to have the growth rate set at 3% while COE is being priced equal or higher than the current level. It is ultimately the COE that determines the deregistration rate and the percentage of vehicle undergoing inspection. However, the impact of higher COE on vehicle inspection has come on stronger and earlier than I have expected. Based on figures, a total of 45% of the car populations underwent inspection last year, which means the situation might be gloom for VICOM in 2013. Personally, using the latest figures, I foresee that vehicle inspection is likely to be peaking this year in term of growth. While revenue is very unlikely to fall, I do not see visibility in earning growth in 2013. For 2012, the general trend is likely to contribute another 5% growth in revenue for the current year.

As such, SETSCO needs to prove its ability to further contribute to the bottom line just for 2013.

Figure 4 - SETSCO Segmental Result

The soon-retiring CEO, Mr Heng Chye Kiou, has done an excellent job in making the decision to acquire SETSCO and transforming it to be the largest ITC company in Singapore. He has a great vision in using SETSCO to diversify against vehicle inspection and build it into a profitable business. While revenue only increases by 2.5 times, EBIT has increased by 7 times as a result of profit margin increasing from 7% to 19%.  For FY 2011, revenue increases by 7.37% while EBIT increases by 7.68%. Addition to vehicles, premises and equipment hit 10.5k as a result of cost of new building construction being allocated to SETSCO. This is pretty fair as other than HQ, another purpose of it was to build more testing facilities and laboratory for SETSCO. It involved training facilities for NDT courses, microbiological testing laboratory, office for NDT department and for calibration and measurement to expand their facilities.

A few new developments has happened and I was unaware of it till the recent annual report.

Firstly, SETSCO has been the first and only to be accredited by SAC in October 2011, to provide CAMS (Central Alarm Monitoring System) inspection services to security firms. CAMS not only involve all the intruder alarm installed in the private estate, it also includes security system at banks, pawn shop as well as ATM. Yes, it is on a very major scale and is a stable source of recurring income as CAMS operator's license are subjected to renewal on an annual basis. As for the actual requirement of SETSCO, I am still unsure if the inspection is supposed to be conducted yearly or once every 3 years. I am not willing to pay $60 to SPRINGS just to get the full documentation as it just does not make sense to pay money to check about regulation. According to SPF, there's more than 250 security agencies though not all are CAMS operator.

SETSCO has also recently acquired the equipment and trained staff to conduct testing on sports flooring, being one of only 2 laboratories that is capable of doing the testing. Sport flooring is about the surface and the hardness of the floor found in indoor and outdoor sports hall. Currently, about one-third of all schools has been equipped with a modern indoor sports hall which work out to be around 100 schools. This test will be to meet the requirement of BS EN 14904 to ensure that the flooring of the school's sport hall meet the standard to be safe for use.

Last but not least, it has a very significant development going on which I have not expected SETSCO to be venturing into earlier on - "We are also looking at developing more testing services including setting up a new electrical calibration & testing laboratory". Electrical products testing has always been TUV SUD PSB's strength, holding a significant market share in this area in Singapore.

In fact, SETSCO has already embarked onto electrical and electronics product certification June last year. Just to recap, the ITC industry is about inspection, testing and certification. Traditionally, SETSCO has been very weak in the area of certification, but has since 2010 started to grow this segment aggressively by securing accreditation for certification of cement, fire products and now electrical and electronics products. This can be a rather lucrative field as product certification are done on a more frequent basis especially electrical products like adaptor, kettle, audio products, fans, lamp and 3 pin plug. For the full list, please refer to the following url:

Figure 5- Competition in Electrical Testing

As written on the annual report, the new laboratory that they are planning to set up is for electrical calibration & testing and not for certification. As seen from figure 5, the bulk of the competition in electrical calibration & testing lies in TUV SUD PSB with 29 approved area of testing whereas the others are just very small players. SETSCO has historically never touch on electrical product certification or testing, but since the certification side has already been established, it should been going into electrical testing as soon as this year. With 50 sub-categories within electrical testing and competition being sparse, it will not be a hard task for SETSCO to establish itself in this area. If it succeed in growing this segment, SETSCO will then be the only one in Singapore to be able to provide a full range of testing, certification and inspection services across all areas (electrical, biological, chemical, civil engineering, environmental, NDT, mechanical and calibration).

As such, 2012 is likely to be yet another year of record profit and revenue, bagging its 8th year of double digit CAGR in profits.Vehicle inspection business will be reaching its peak earnings this year delivering its best ever results. However, 2013 might be a tough year in terms of its growth potential and prospect as the impact of closure of STAI Ayer Rajah and the slowing deregistration rate will be almost fully realised in 2012. 2014 will then be different with the implementation of Euro V standard by the Singapore government, increased diesel vehicle take-up rate as well as a revision to the growth rate of car population.

Going forward, I will expect SETSCO to be the main growth driver as well as the main profit contributor. Vehicle inspection has done well over the past years but with its growth potential temporarily capped, it will in turn become a mature cash cow with a sole purpose of generating cash flow and not to grow in size. The transformation of SETSCO has been incredible especially in the area of profit margin growth. This growth is attributable to its continuous expansion in type of services rendered as well as growing demand coming from local and international standard and regulation board. While it has already become the largest ITC company in Singapore, it has always been seeking new sources of revenue as we have seen from its new accreditations gained in the past few years. The expansion into electrical product certification, testing and calibration will bode well for all shareholders as it is not only a large pie but one in which competition is sparse. Last but not least, let's not forget that there's still a wild card in its Middle East JV which has remained dormant in FY 2011.

Thus, don't expect me to be giving up on this stock anytime soon unless you are going to offer me a really really good price, especially when I will be enjoying my 5% dividend yield by the end of August.


  1. There was an article on COE in the Straits Times yesterday. Did u read it?

    1. I did read it and I expect COE to hit a lot higher at more than 100k. Currently, growth rate is set at 1.5% and by august this will be 0.5% growth. This is a 67% cut and obviously prices are going to spike up.

      I have been monitoring the monthly statistics of car population which comes out on the 12th. I believe that extreme high coe prices will be a norm in 2014 even if the government chooses to increase the growth rate. Unless the government revamps the COE system as they realise that this is going to be inequitable with only the rich being entitled to owning a car.

  2. Hi, where do you go to see the monthly car population figures? LTA website? Under what link?


      some of the more important data are vehicle distribution, deregistration as well as by Type of Fuel used

  3. Hi, I'm really impressed by your writing on VICOM and your frank opinion on your investment journey. It takes guts to admit one's mistakes and even greater guts to pen it down and share with the community.

    I'd like to ask on how you managed to focus on value investment, did you pick it up in school? I'm assuming you are in university now, if so, what course of study? This is from one 20ish-year old to another :D

    1. I am not yet in university as I am just done serving the country 5 months ago. I will be studying econs at SMU this coming Aug.

      As for how do I do it, I have all the time in the world and I enjoy the process a lot. I have no homework, neither do I have to bring back work home as I am just a contract worker. Thus, I am rather afraid that when my school starts, I will not be able to devote the same amount of effort as I am currently.

    2. that's good to hear. See you in SMU (I'm starting school the same time as you! Although I'll be taking accountancy).

  4. that is how to make use of NS time instead of playing with play station and just slack there. waste of their freaking time.

    1. neither do i get to play playstation during my time as my ATEC was like 2 months before I ord. I do regret not having started before NS, then I will have gained more than 1 year plus of experience.