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Vicom: A Consistent Dividend Growth Share with an Above Average Yield

Vicom (SGX: V01) might be a small fish in the big ocean of our financial markets with a market capitalisation just north of S$520 million.

But, it’s a company that will likely be familiar to most drivers here in Singapore – the company runs seven out of the nine vehicle inspection centres here. Depending on the type and age of the vehicle, drivers would have to send in their vehicles for inspections ranging from once every six months to once every two years.

For dividend investors looking out for both high yields and growing pay-outs, Vicom would also likely be a familiar company. Turning first to its yield, the company’s annual dividend in 2013 was S$0.225 per share. This translates into a trailing dividend yield of 3.8% at Vicom’s current share price of S$5.92. In contrast, at the Straits Times Index’s (SGX: ^STI) current level of 3,299 points, it’s carrying a yield of only around 2.7%.

As for Vicom’s track record in growing dividends, it is aptly summarised in the table below:

Year Dividends per share (Singapore cents)
2003 6.30
2004 5.75
2005 8.50
2006 11.9
2007 15.5
2008 9.25
2009 11.8
2010 16.1
2011 17.6
2012 18.2
2013 22.5

Source: S&P Capital IQ

With such a track record, a question might pop into mind: Can it continue growing those pay-outs? For starters, I’ve previously shared three important financial characteristics that shares with solid dividends ought to display: 1) A track record of growing dividends; 2) an ability to generate free cash flow that’s consistently higher than its dividend; and 3) a strong balance.

Vicom has aced those historical measures. And, there are other signs that the company might continue doing well.

In 2010, the company’s vehicle inspection business and other ancillary services had provided roughly one-third of its revenue and two-third of its profits (Vicom has stopped breaking down its revenue and profit segments from 2011 onward). In this segment, with its leading market share (as judged from the number of centres it owns), it’s easy to see how the company could have the ability to easily raise its fees. This is especially so given that the vehicle inspections are mandatory. According to analysts, as of 9 May 2014, the last time Vicom had raised fees was in 2006. Any potential fee hikes could be a boon for the company.

The authorities had reduced the annual growth rate of Singapore’s total vehicle population in 2009 from 3% to 1.5%. Then, in 2011, the growth rate was further slashed to 0.5%, which would be maintained till January 2015. Would authorities prevent Singapore’s vehicle population from growing further come 2015? That’s a plausible scenario, though unlikely as the population of people in Singapore is expected to continue to grow. And as long as the overall vehicle population can increase, that’s a tailwind for Vicom given its inspection services caters for “all types of vehicles, such as cars, light goods vehicles, commercial vehicles, motorcycles, heavy goods vehicles, buses and taxis.”

Vicom’s other line of business is housed under its Setsco subsidiary. Setsco’s bread and butter is the provision of “a comprehensive range of testing, calibration, inspection, certification, consultancy and training services to key markets such as Oil & Gas, Aerospace, Marine, Food, Electronics, Environmental, Construction, and Building & Facilities.” In 2010, the subsidiary had been responsible for roughly two-thirds of Vicom’s revenue and one-third of its profit.

Setsco was acquired by Vicom in 2003 for S$15.7 million. In that year, Setsco had brought in annual revenue of S$22.8 million. Despite competing against much bigger rivals (Setsco’s competitors include SGS SA and Bureau Veritas; in 2003, their annual revenues were approximately S$3.37 billion and S$2.75 billion respectively), Setsco had managed to more than double its top-line to S$51.4 million in 2010. Vicom’s management remains confident of Setsco’s progress and commented in the company’s latest first quarter results that “the non-vehicle testing business [referring to Setsco] is expected to grow despite the keen competition.”

Of course, it’s not all a bed of roses for the company either. There are still risks involved. The total vehicle population in Singapore is very important for the company as vehicle testing and its ancillary services are such an important part of Vicom’s business; the negative impact on the company from any possible fall in vehicle numbers could be huge. Latest figures from the Land Transport Authority though, have been promising:

Year Total vehicle population
2009 925,518
2010 945,829
2011 956,704
2012 969,910
2013 974,910

Source: LTA

Opacity in its financial figures is also one source of risk. Since 2011, Vicom has stopped providing a breakdown of its revenue and profit sources as mentioned earlier. This leaves investors with little to work with in regard to the progress of both Setsco and the vehicle inspection business. It’s not an ideal situation as that could leave investors blind-sided should there be deterioration in one part of the business that might just weigh down the company’s overall results in the future.

All told, Vicom’s tailwinds could be summarised as such: 1) Pricing power in its largest profit driver; 2) likely growth in vehicle population; and 3) a resilient and capable non-vehicle testing business.

Risks in the company though, in my opinion, are: 1) Vehicle populations could still fall; and 2) there’s no clear breakdown of its revenue and profit sources, leaving investors with a slightly cloudy picture of its future.

Investors interested in Vicom would have to weigh up both the pros and cons themselves.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.