Vehicle and non-vehicle inspection and testing outfit Vicom Limited (SGX: V01) has been an outstanding winner in Singapore’s share market over the past decade. Since the start of 2005, Vicom’s shares have jumped by 546% in price, far out-pacing the 60% returns that Singapore’s market barometer the Straits Times Index (SGX: ^STI) has delivered over the same period. Can Vicom continue to go the distance? Here are five reasons why I think it may. 1. It’s a stable business Vehicles in Singapore are required by law to undergo regular inspections on a schedule that’s determined by the age, type, and…
Vehicle and non-vehicle inspection and testing outfit Vicom Limited (SGX: V01) has been an outstanding winner in Singapore’s share market over the past decade.
Since the start of 2005, Vicom’s shares have jumped by 546% in price, far out-pacing the 60% returns that Singapore’s market barometer the Straits Times Index (SGX: ^STI) has delivered over the same period.
Can Vicom continue to go the distance? Here are five reasons why I think it may.
1. It’s a stable business
Vehicles in Singapore are required by law to undergo regular inspections on a schedule that’s determined by the age, type, and purpose of the vehicle. With Vicom controlling seven of the nine inspection centres in Singapore that provide the required vehicle inspection services, the company has a stable profit-base on which it can build its business.
It’s worth noting that Vicom’s vehicle inspection and testing business had been responsible for around two-thirds of the company’s total profit in 2011 (the company stopped segmental reporting from that year onward).
2. It’s consistent
One important thing in a business that billionaire investor Warren Buffett looks out for when he invests is a track record of consistent profitability.
Source: S&P Capital IQ
Over the decade ended 2014, Vicom has seen its revenue and profit grow in each consecutive year. With such a track record, Vicom’s a shoo-in when it comes to consistency.
3. It’s very profitable
The following’s a table showing how Vicom’s profitability metrics – the net profit margin and return on equity – stacks up against the blue chips within the Straits Times Index.
Source: S&P Capital IQ
I trust it’s easy to observe that Vicom’s net profit margin and return on equity is a cut above the median selfsame figures for the components of the Straits Times Index.
4. It’s financially strong
A hot topic in the financial media lately is the possibility of a rise in interest rates. Companies that have been binging on cheap-debt over the past few years will rightfully be worried about how their businesses might handle an era of higher interest rates.
But, that’s a worry which does not plague Vicom. With S$98 million in cash and zero borrowings as of 31 March 2015, the testing and inspection outfit’s balance sheet is rock-solid.
Source: S&P Capital IQ
In addition, the firm’s strong ability to generate cash from its business (see chart above) also helps bolster its financial strength.
5. It has capable management
When it comes to assessing managerial competence, Buffett often casts his eye on a company’s return on equity. Here’s him explaining his thoughts in his 1977 Berkshire Hathaway Annual Shareholder’s Letter:
“Most companies define ‘record’ earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share.
After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding. … we believe a more appropriate measure of managerial economic performance to be return on equity capital.”
If Buffett were looking at Vicom’s business results, he’d likely think the company has aced it: Vicom has generated an impressive average return on equity of 22% from 2004 to 2014 and it has done so with a balance sheet that has carried either minimal or zero borrowings. You can see these in the chart below:
Source: S&P Capital IQ
Beyond that, Vicom’s management has also displayed signs that they’re constantly looking for ways to grow the business. As an example, here’s a snapshot of some of the new capabilities and services that Setsco has introduced over the past few years as seen in Vicom’s annual reports:
- In 2010: “In October 2010, [Setsco] was awarded a new accreditation by Singapore Accreditation Council under the Accreditation Scheme for Product Certification. It was also accredited for Ready-Mix (RMC) and Fire Safety Products (FSP) certification during the year.”
- In 2011: “Setsco was accredited by the Singapore Accreditation Council as an Inspection Body for the Central Alarm Monitoring System (CAMS) based on the requirements of the ISO/IEC 17020, becoming the first company in Singapore to provide CAMS inspection services to all the major security firms.“
- In 2012: “In June 2012, Setsco Services Pte Ltd was awarded the OHSAS 18001:2007 certification by Certification International, further enhancing its qualifications in the area of safety and quality testing. A new electrical testing field has been set up at the second floor of the new building at Teban Gardens and was accredited under the Singapore Accreditation Council – Singapore Laboratory Accreditation Scheme on 9 September 2012”
- In 2014: “In the medical field, Setsco Services Pte Ltd’s (SETSCO) clinical laboratory expanded its services to include testing for heavy metals and organics in blood and urine.”
A Fool’s take
There are many things to like about Vicom as a potential investment. But, there’re important risks to consider too.
For instance, any reduction in the vehicle population in Singapore could hit Vicom’s business hard. Also, with Vicom being valued at 18 times its trailing earnings at its current price of S$6.20, it’s not exactly a cheap share. To give some perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the Straits Times Index – has a price-to-earnings (PE) ratio of just 13 currently. With Vicom’s above-average valuation, any hits to its earnings can spell pain for its investors.
All told, investors would have to weigh the risks and rewards carefully with Vicom in order to come up with an intelligent investing decision.
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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 owns shares in Vicom and Berkshire Hathaway.