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Tug of Fools: VICOM Limited – The Bull Argument

I am Peter Ng and this is my bull case for VICOM Limited  (SGX: V01).

The subsidiary of transport conglomerate, ComfortDelGro Corporation Limited (SGX: C52), VICOM, would most likely be a familiar name for vehicle owners as the company owns and operates seven out of nine approved vehicle inspection centres in Singapore.

Under the regulations by the Land Transport Authority (LTA) of Singapore, it is a requirement to send vehicles of age three years old and above (from the date of registration) for at least a biennial inspection at one of the nine approved inspection centres.

VICOM runs the vehicle inspection centres under the names of VICOM and JIC Inspection Services (78 percent owned) in Singapore.

Here, I will put forth three pointers, entailing why VICOM is and will remain as a bullish case.

Revenue Visibility

VICOM derives majority of its revenue from the provision of inspection and testing services for vehicles and non-vehicles. This segment represented 96.4 percent of the revenue recognised in FY13.

Apart from the non-vehicle related segment, the company’s vehicle segment provides a large degree of revenue visibility, given that its revenue stream is approximately with some adjustments,  a function of the number of cars in Singapore that are aged three years and above.

Adjustments have to be made considering that they own seven out of nine vehicle inspection centres and not all in Singapore.

Revenue of VICOM between FY10 and FY14

vicom bull 1

Source: Company’s Annual Report

VICOM’s revenue stability can be reflected in its revenue trajectory which has grown at a compounded annual growth rate (CAGR) of 6.5 percent between the five-year period of FY10 and FY14.

Some may argue that with the lower rate of new car registrations that is mainly due to the higher cost of ownership, the company’s revenue growth may be hampered.

However, the higher premiums would at the same time lengthen the duration of car ownership, as consumers turn to used cars that are generally less expensive compared to new ones.

As cars are only required to be sent for inspections after the third year, a lower cost of ownership could induce more purchases of new cars by consumers as opposed to old ones and in this case, resulting in a lower age cycle of cars on the road, thereby having a negative impact on the company’s revenue.

Some may wonder that the dependence on used cars may eventually come to a halt, since old cars would eventually be retired, as well as new cars have to be registered in order to continue the transition of these cars beyond the three-year mark before revenue could arrive for VICOM.

Indeed, this could be true if the country’s vehicle population is declining, however, statistics published by the LTA paint a different picture.

Singapore’s vehicle population which includes other types of vehicles such as buses, taxis, motorcycles and others, currently stands at 974,170 as at 2013, returning a 1.3 percent CAGR for a five-year period between 2009 and 2013.

The sustained growth in the country’s vehicle fleet will be able to drive a consistent revenue stream for VICOM.

Besides, considering that it has a dominating position of a 77.8 percent market share according to the number of vehicle inspection centres VICOM owns, the company is able to command a significant level of pricing power even in the event of a decline in vehicle inspection volumes.

Rock-Solid Balance Sheet

More often than not, a strong and stable business model has to be accompanied with a balance sheet of a matching strength in order for a business to be sustainable in the long run.

As at FY14, VICOM’s balance sheet recorded a total asset position of $169.3 million, out of which, more than 50 percent of the amount consists of cash and cash equivalents.

A large position of cash relative to its total asset position awards multiple gateways of opportunities for a company, be it as a war chest for to make acquisitions for growth, a buffer in case of an urgent need for funds or simply to return them back to shareholders through share re-purchases or special dividend pay outs.

Furthermore, the company does not have any debt in the form of bank loans or corporate bonds on its balance sheet.

This means that not only would there be no financial burden imposed in the form of interest payments on the company, but importantly the constant woes of an interest rate hike would have almost no impact on VICOM.

Amounting to $29.4 million, its liabilities are mainly made up of trade payables which are a part of the company’s working capital or amounts that are incurred from its business operations.

Considering the company’s current ratio (current assets divided by current liabilities) of 3.8, the high multiple provides a clear indication that the company is able to soundly meet its short-term financial obligations.

All in all, these factors above formed the pillars of a rock-solid balance sheet for VICOM.

Tapping Into The Growing Vehicle Population

VICOM’s vehicle inspection and testing business segment presents a case of a strong and stable business model where it owns seven out of nine vehicle inspection centres in Singapore. Furthermore, as the LTA requires vehicles to be sent in for regular inspections as well as a growing vehicle population in Singapore, this creates both a growing and recurring stream of revenue for the company.

Accompanied with a rock-solid balance sheet where majority of the company’s assets are piled with cash, there is of no surprise wonder why VICOM shareholders could be smiling despite being caught in a traffic jam.  Click here to read the bear argument by theMotley Fool Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Share Investment's Peter Ng owns shares in ComfortDelgro.