Vicom Limited (SGX: V01) has been one of the best-performing shares in Singapore over the past decade. From a price of S$0.96 at the start of 2005, shares of Vicom have since climbed by 558% to S$6.32 (as of 29 April 2015). The company’s returns are even more remarkable when we consider that Singapore’s market barometer, the Straits Times Index (SGX: ^STI), had delivered gains of “just” 69% over the same time frame. But, can the company continue being a great investment? A large part of the answer to the question resides in the quality of Vicom’s business, keeping in…
Vicom Limited (SGX: V01) has been one of the best-performing shares in Singapore over the past decade. From a price of S$0.96 at the start of 2005, shares of Vicom have since climbed by 558% to S$6.32 (as of 29 April 2015).
The company’s returns are even more remarkable when we consider that Singapore’s market barometer, the Straits Times Index (SGX: ^STI), had delivered gains of “just” 69% over the same time frame.
But, can the company continue being a great investment? A large part of the answer to the question resides in the quality of Vicom’s business, keeping in mind the idea that it’s the performance of a share’s business which drives its price over the long-term.
Clues for quality
Here’s a useful nine-point checklist – designed by investor and author Pat Dorsey and found in his book The Five Rules for Successful Stock Investing – which can help in assessing the quality of a business:
- The firm provides regular financial updates, has a long track record as a publicly-listed entity, and has a market capitalisation that isn’t too small.
- It has consistently earned an operating profit.
- It has generated consistent operating cashflow.
- The firm earns a good return on equity.
- It has been able to grow its earnings consistently.
- It possess a clean balance sheet.
- The firm can generate lots of free cash flow.
- There are infrequent appearances of one-time charges.
- There has not been major dilution of shareholders’ stakes in the firm.
The checklist is meant to help quickly sift out companies with quality businesses that are worthy of a deeper look by investors; companies which can tick most boxes in the checklist would likely by good businesses.
For a deeper look as to why the checklist makes sense in the context of finding a quality company, you can check out my colleague Chin Hui Leong’s work. It’s a three-part series, so here they are: Part 1, Part 2, and Part 3.
With that, let’s put Vicom to the test.
A strong showing
As a brief introduction, Vicom runs vehicle inspection and testing centres in Singapore and also provides a wide array of testing and certification services for a broad range of industries.
Vicom, with its 20 years of history as a publicly-listed firm (the company was listed in 1995), quarterly earnings releases, and sizeable market cap of S$570 million, has aced Dorsey’s first criterion.
The chart below (Chart 1) provides a snapshot of how Vicom has been able to consistently generate operating income, net income, operating cash flow, and free cash flow from 2004 to 2014. What’s more, all four important financial metrics have also been growing in almost clockwork-like fashion. Given these, Vicom would clearly deserve a tick in the box for criteria 2, 3, 5, and 7.
Source: S&P Capital IQ
Chart 2 below plots Vicom’s returns on equity and key balance sheet figures for the same timeframe as above. As you can tell, the company has not only managed to generate a very strong average return on equity of 22% over the period under study, it has also done so with a fortress-like balance sheet that has carried zero debt since 2005.
This is remarkable because leverage is often used by companies to help juice their returns on equity; in Vicom’s case, it has managed to generate its high returns without the need for debt.
With that, the company has certainly scored well for criteria 4 and 6 in Dorsey’s checklist.
Source: S&P Capital IQ
We’re down to the penultimate criterion on the checklist and this is where Vicom shines too – the firm has hardly incurred any significant “one-time” charges over the past decade.
Source: S&P Capital IQ
The last chart (Chart 3) shows us how Vicom’s share count has changed from 2004 to 2014. While there’s been some slight increase over the years, it’s worth pointing out that Vicom’s share count has been inching up at just 0.7% per year on average for the period we’re looking at. That hardly counts as major dilution and so, Vicom would deserve a “yes” here as well.
A Fool’s take: 9 points for a champ
In a round up of the scores, we have Vicom acing all nine measures found in Dorsey’s checklist. This is a sign that the firm may possess a strong business and can thus stand a chance of being able to continue being a great investment.
But that said, more work needs to be done beyond this before any investing decision can be reached; Dorsey’s checklist had been designed to help narrow the field and wasn’t meant to be used to pick investments.
The strength of a company’s business is just one piece of the puzzle (albeit an important one) – there are other crucial factors to consider too, such as the firm’s future prospects and valuation.
For more investing analyses and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Also, like us on Facebook to follow our latest hot articles.
The Motley Fool's purpose is to help the world invest, better.
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 owns shares in Vicom.