Monday, August 20, 2012

VICOM - 2012 1H Update

With the release of 2012 1H results, VICOM has hit an all-time high of $4.70 after PAT increased by 10.7% in 2012 1H.

Figure 1 - Income Statement

The 1st quarter has been the most spectacular with profit growing by 13.2%. Comparatively, Q2 2012 has not been as fantastic, delivering a 8.1% growth on profit after taxation. Revenue for both period grows at an average of 7.9%. Unfortunately, VICOM no longer discloses the segmental result after the change of CEO. Personally, I believe that both segments should be delivering similar growth at 7-8% and not that one particular segment has been driving the growth. 

Back to operating expense, total operating expense increases by 8.6% in 2Q 2012 and 3.1% in 1Q 2012. Staff cost increases by only 0.4% in 1Q 2012 due to write-back of provisional bonus while in 2Q2012 it is in line with total revenue growth. Depreciation expenses increase as a result of higher depreciation coming from the new building at teban garden. All other operating expenses continue to increase above the increase in revenue which makes me wonder if cost-saving is indeed achieved from shifting the HQ to teban garden.

With the help of lower taxation in 2Q 2012, VICOM managed to achieve a 8.1% growth in profit. Lower taxation comes from "enhanced capital allowances on qualifying expenditure under the Productivity and Innovation".

Figure 2 - Balance Sheet

After the distribution of $9.4m in final dividend, cash and bank balances manage to increase by $600k despite a $3.5m reduction in trade and other payables. Nothing else worth mentioning about the balance sheet other than that compared to FY2011, vehicles, premises and equipment decreases from $55.5m to $54.7m which shows that depreciation is more than total capital expenditure.

For cash flow statement, VICOM generated 81% operating cash on net profit after taxation. It is supposed to be higher as trade receivables increased by $1m and trade payables decreased by $3.5m. Total capital expenditure is only $1.9m for 1H 2012 which is about 15% of net profit. Personally, I do expect a 100% and above FCF/Net Profit Yield for FY 2012. As capex has been significantly reduced with the completion of new HQ at SETSCO, the interim dividend declared increases from 6.9 cents to 7.5 cents. This is still a very comfortable payout ratio for VICOM and there's certainly room for another 10-20% more. Total dividend paid for the interim will be $6.6m which is approximately net profit for a single quarter.


Just last month, Minister Lui has announced a few measures to ease the spike in prices of COE which are marginally beneficial to VICOM. Initially, car population growth rate is supposed to be cut from the current 1.5% to 0.5% by August this year and continued until 2014 where the growth rate will be subjected to change. The authority has since delayed the cut to 0.5% to February 2013 while maintaining a 1% growth rate from August 2012. According to LTA, an additional 390 COE will be made available per month which works out to an extra 2340 vehicles in total.

The clawback of oversupply of COEs will also be delayed by a year to July 2013, making available 266 more COE per month, which is 3192 in total. In another move, LTA has set the taxi fleet growth rate at 2% pa from Aug 2012 to December 2013 and they will not be bidding for COE. While the 2% growth rate will come at the expense of Cat E COE, a taxi contributes 7x the revenue of a civilian car in a 3 years period.

These measures are temporary moves that will only defer the cut so as to alleviate the spiking COE prices which played an important role in our CPI. Most importantly, they signal the will of the government to resolve the problem of overcrowding vehicle population.

Figure 3 - Age Distribution Data

The age distribution data has been one of the most important data that I monitored monthly from the LTA site as it determines the proportion of the population undergoing inspection. The continued ageing profile of vehicle population has continued to amaze me. As seen from Figure 3, the proportion of vehicle aged 6 years and above has increased by 9.7% in July 2012 as compared to December 2011. When this ageing will start to peak is beyond my ability though I do expect the trend to continue at least until the end of this year. For as long as the price of COE remains at the current level, I do not foresee any significant reversal in the age profile.

As for SETSCO, I am not aware of any new service that they have been accredited in FY 2012. As for inspection of central alarm monitoring station (CAMS), they are currently still the only one with the appropriate accreditation.

Should the earning growth continues, we should expect a minimum of 8-10% profit growth in FY 2012. Assuming a 10% growth, total dividend to be paid out for FY 2012 will be $0.194 based on similar payout ratio of 60%. At the current price of $4.56, it will give us a 4.25% dividend yield, PER of 15.4x or Forward PER of 14.3. Many will definitely ask me whether it is the right price to buy or not and my answer will be that the margin of safety at the current price will be limited. However, I will still be holding on to my shareholding as I believe that the growth story of VICOM is not yet over and will be able to prove its resilience during this period of economic uncertainty.


  1. Thank you for excellent analysis on VICOM! Glad to read.

    A question from me is that, when the price of a stock has come to a point with little margin of safety so that it is not considered to be attractive to buy, why should it be considered to be good to hold?

    1. When we buy, we will always demand a margin of safety to the so-called fair-value. However, when it reaches the fair value, one need not necessarily have to sell as long as the reason to buy remains and that one can see potential growth forward. In that case, one is expecting that this current fair value will continue to grow in the future.

      That is from an individual stock perspective. If we will to talk about portfolio, then another thing to consider is whether there is any better and cheaper stock out them for one to switch into. If one has sufficient cash level and yet will not be able to find a better alternative, then it does not make sense to sell the stock if growth and dividend remains.

      I might be wrong too since I have only been in the market for 1 year.

  2. Generally, investors sell when it is OVER-valued, not when it is fairly valued.

    Another way to measure if you should sell - can you find an equivalent company giving the same yield and with the same risk profile? If not, then just continue to hold on!

    1. true indeed. it seemed like it's always so much harder to sell than to buy