What Does the Future Hold for This Winning Stock? – Part 1

Shares of VICOM Limited (SGX: V01), has outperformed over the last five plus years. The company’s shares are up 324% from 1 January 2009 to its closing price on 18 December 2014. By comparison, the capital gain returns of the SPDR STI ETF (SGX: ES3) was 75% for the same duration. The SPDR STI ETF is a proxy for the market barometer, Straits Times Index (SGX: ^STI). The company also distributed dividends worth 95 cents per share over the same period.

While the shares of VICOM have been zooming — as Foolish investors, we should look under the bonnet to understand its drivers of growth.

A closer look

The business of VICOM can be divided into two main business segments. The first segment is the vehicle inspection business. Car owners may be familiar with this, as most of them would be required to send their vehicles for inspection at least once a year. The second segment, which is provided by its SESTCO subsidiary, is involved in providing testing, calibration, inspection, certification, consultancy, and training services to a wide range of industries. This segment is what the management team often refers to as the “non-vehicle testing business”.

 Vicom - 1

Source: Company Earnings Report

The financial year for VICOM coincides with the calendar year. Over the last five financial years, VICOM has increased its topline at an annualized compounded rate of 6.1%. For FY2013, VICOM did not breakdown its revenue by business segment. The last available business segment breakdown was provided by the company in FY2011. In that particular year (FY2011), the vehicle inspection business segment made up 31% of total sales while test & inspection services took up 61% of sales. The rest of the sales came from other auxiliary services. Judging from the previous year’s growth rates, the make-up of its business segments could still be approximately similar.

For FY0213, the vehicle inspection business saw 520,000 vehicles passing through its inspection lanes. The inspection centres also offers auxiliary services such as motor insurance and road tax renewal, in-vehicle unit (IU) maintenance, car evaluation, vehicle emission certification, enforcement inspection, and accident vehicle assessment.

In the same year, the SETSCO business undertook more projects within the oil and gas, marine and offshore, and construction industry. Beyond that, the non-vehicle testing business has obtained accreditation for British Institute of Non-Destructive Testing (BINDT) for the aerospace industry and was approved by the Ministry of Health for basic health screening services.

Foolish summary

The exercise above is to look at the sales alone. Future growth in the vehicle inspection and testing services may be limited by the number of cars in Singapore and Vicom’s ability to raise prices for inspections. In contrast to the first segment, non-vehicle testing is the space where Vicom can drive revenue growth in the foreseeable future. However, as the management team noted, competition is more keen in the non-vehicle testing business.

As a next step, we should observe if the topline growth trickles down to the bottom-line for it to sustain its growth in share price. Read on in the second part of this article here.

As of the closing price on 18 December 2014 of $6.20, VICOM traded at a trailing earnings ratio of about 18.5, and has a dividend yield of around 3.8%.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.