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3 Takeaways From VICOM Limited’s Latest 2018 Annual Report

VICOM Limited (SGX:V01) is notoriously vague when it comes to its quarterly earnings update. It is common to find a single-sentence “performance review” in its earnings announcements. As such, the only useful business update comes annually from the company’s annual report.

With VICOM’s annual report released earlier this week (25 March 2019) I was eager to find out the key developments in the company’s business in 2018. Here are three things I found.

Government’s push toward car-lite society lowered volume of cars inspected

The bulk of VICOM’s business comes from its car inspection services performed across its seven centres in Singapore. In 2018, the government of Singapore continued its push towards a car-lite society, introducing several new policies. This included the “zero-growth” policy for passenger cars and motorcycles, down from the previous growth target of 0.25%. The policy took effect from February 2018, together with other various schemes to encourage the early scrapping of older and more pollutive cars.

As a result, the total number of vehicles due for inspection in 2018 hit a three-year low of 625,940, compared to 629,106 in 2017. VICOM inspected 461,088 vehicles in 2018, about 7,700 fewer than in 2017.

New tests to lower the exhaust emissions of in-use petrol vehicles propped up revenue and profitability

Despite the lower volume of vehicles inspected in 2018, the implementation of two new tests more than offset the vehicle volume decline. In April 2018, VICOM implemented the new High/Low idle test to tighten the exhaust emission standards for in-use petrol vehicles. Under this test, carbon monoxide limits were lowered for newer petrol vehicles (carbon monoxide has an important indirect effect on global warming). In addition, hydrocarbon limits were introduced for all in-use petrol vehicles and motorcycles.

In July 2018, Phase II of the new vehicle Emission Scheme was implemented. Under the scheme, the level of pollutants known as Particulate Matter affect how much rebate or surcharge vehicle owners enjoy or pay. This has brought higher business volume to the VICOM Emission Test Laboratory.

Non-vehicle Inspection and testing division

Lastly, VICOM’s non-vehicle inspection and testing division, Setsco Services Pte Ltd, secured several high profile contracts in 2018. These included the Building and Construction Authority’s contract to test essential building materials prior to use at construction sites, and the Changi Terminal 5 Package 2 project to conduct soil testing, among others.

But, VICOM does not provide a complete breakdown of revenue-contributions from its non-vehicle inspection and testing division, and this division is probably a smaller contributor to VICOM’s overall business.

The Foolish takeaway

2018 was a year of growth for VICOM, with revenue up 3.1% and operating profit (excluding one-off income) up around 9.6% on the back of new vehicle tests implemented during the year. Revenue and profits from the new tests more than offset the decrease in the number of vehicles inspected.

From what I have read in the annual statement, investors should expect flat car volume inspection this year but full-year contributions from the High/Low idle test should continue to propel the company’s revenue and profit in 2019.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of VICOM Limited.  The Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.