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VICOM Limited 2018 Earnings: Bumper Dividend From Surrender Of Lease

Yesterday evening, VICOM Limited (SGX: V01) released its 2018 full year earnings update. The company is a leading provider of technical testing and inspection services in Singapore. Here are some key takeaways from VICOM’s latest results announcement:

1. Revenue for the full year was up 3.1% from S$97.0 million in 2017 to S$100.1 million because of higher business volumes.

2. Total operating costs increased by a lower rate of 2.3% from S$66.6 million to S$68.1 million, as several categories of expenses – such as repairs and maintenance and contract services – declined. The declines were partially offset by higher utilities and communication costs.

3. During the year, there was S$7.7 million recognized as a net gain on the surrender of the lease of a property at 18 Teban Gardens to JTC Corporation. The surrender was announced on 6 December 2018 and VICOM’s subsidiary, SETSCO, will offer to rent the property from JTC up till 31 December 2020. As a result of this one-off gain, VICOM’s operating profit jumped by 30.3% from S$30.5 million in 2017 to S$39.7 million.

4. Profit attributable to shareholders increased by 30.9% as a result, from S$26.5 million to S$34.7 million. If we strip out the one-time gain, VICOM’s net profit for the year would have been S$27 million, up by around 1.9% year on year.

5. Regarding the surrender of the 18 Teban Gardens lease, JTC will pay SETSCO around S$2.68 million to defray its relocation costs. Back in September 2018, VICOM announced the purchase of a new property at 531 Bukit Batok Street 23 for S$22.4 million from Mapletree Logistics Trust (SGX: M44U).

6. VICOM continues to maintain a clean balance sheet free of debt; as of 31 December 2018, its cash balance was S$104.1 million.

7. Total capital expenditure for 2018 was S$26.2 million, which included the aforementioned purchase of the Bukit Batok property for S$22.4 million. Without the property acquisition, VICOM’s capital expenditure would have been just S$3.8 million, lower than 2017’s S$4.4 million. With operating cash flow of S$30.1 million, VICOM’s free cash flow in 2018 was S$26.3 million. This is slightly lower than 2017’s free cash flow of S$28.8 million, but is still respectable.

8. VICOM declared a final dividend of 23.17 Singapore cents per share and a special dividend of 8.62 Singapore cents per share for 2018, for a total of 31.79 Singapore cents per share. This is 38.9% higher than 2017’s final dividend of just 22.88 Singapore cents per share.

9. For the whole of 2018, VICOM’s overall dividend amounted to 45.25 Singapore cents per share, up by 25.6% from 2017’s overall dividend of 36 Singapore cents per share. Based on VICOM’s share price of S$6.10 as of 11 February 2019, the company has a trailing dividend yield of 7.4%. If the special dividend is excluded, the trailing dividend yield would be exactly 6%.

10. Barring further declines in Certificate of Entitlement prices for vehicles in Singapore, VICOM expects its vehicle testing division to remain stable. The company intends to introduce new services for its non-vehicle testing division to counter any drop in demand arising from a slowdown in Singapore’s economy.

In summary, VICOM continues to pay a healthy dividend even though the growth in its revenue and profit is in the low single-digits. The company remains a good cash cow with its dividend yield of 6% and its strong balance sheet. VICOM’s management also seems willing to continue to pay out excess cash that the company does not require for daily operations; VICOM’s current pay-out ratio (dividend as a percentage of earnings) is at 120% after stripping out one-time gains. But, the current pay-out ratio does not look sustainable and may have to be reduced to a level of 80% to 90% in future years.

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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston owns shares in VICOM Limited.

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing owns shares in VICOM Limited.