After owning VICOM Limited‘s (SGX: V01) shares for close to five years, I finally decided to part ways with the company. The vehicle inspection company has been on a tear of late, with its share price climbing 16.7% year-to-date. It also paid out a bumper dividend in 2018, bringing its dividend up to 45.25 Singapore cents per share.
At its current price of S$6.98, that translates to an attractive dividend yield of 6.5%. Despite this, I feel it is the right time to finally part ways. Here’s why.
My initial investment thesis did not play out
When I first decided to invest in VICOM in 2014, the Singapore government was increasing the number of vehicles at about 0.5% per year.
However, since then, the Singapore government has pushed towards a car-lite society and in 2018, introduced a “zero-growth” policy for passenger cars and motorcycles, down from 0.25% in the previous three years.
Coupled with various policies to encourage early scrapping of older and more pollutive vehicles, the number of vehicles that VICOM inspected in 2018 hit a three-year low, 7,700 fewer than in 2017.
The lower number of vehicles inspected have hit VICOM’s top line with revenue declining from S$108.2 million in 2014 to S$95.3 million in 2018. Net profit excluding one-off gains has also declined from S$30.1 million in 2014 to S$27 million in 2018.
Furthermore, the board increased its dividend payout ratio and for 2018, paid out around 120% of its earnings in total dividend, including special dividend due to a one-off gain. But investors should know that this dividend policy is far from sustainable and dividends will eventually have to come back down in line with its earnings.
Long-term growth remains muted
In 2018, VICOM managed to eke out higher operating earnings through the implementation of two new tests, which commenced in April and July last year. 2019 will be the first full year where the two tests will contribute to its top line.
There is also a higher number of old private cars that have renewed their certificate of entitlements in 2018s, which should increase the number of old cars requiring inspection.
However, there are no additional catalysts to increase its earnings. Its non-vehicle testing division has also not fared so well and management said that this division remains challenging due to Singapore’s slowing economy. With limited visible long-term revenue drivers in sight, VICOM’s growth prospects look muted.
High valuation and the availability of other investment options
Despite its muted growth prospects, VICOM trades at a fairly high valuation of around 19.6 times its annualised 2019 first-quarter earnings. If the company drops its dividend payout ratio to a more sustainable level of 100% (using the latest quarter’s annualised earnings per share), it will sport a dividend yield of around 4.7%.
This is higher than the Straits Times Index average but lower than most REITs. Some of these REITs also offer greater growth potential.
Sasseur Real Estate Investment Trust (SGX: CRPU), Cromwell European Real Estate Investment Trust (SGX: CNNU), and Frasers Centrepoint Trust (SGX: J69U) each sport higher yields and, in my view, have greater visible organic growth.
Dividend hunters can also turn to other companies like DBS Group Holdings Ltd (SGX: D05) which has a comparable yield of 4.5% but a lower dividend payout ratio, which means it has more leeway to increase its dividend in the future.
The Foolish bottom line
VICOM remains a cash-generative business that will most likely continue to maintain a healthy profit for years to come. However, its growth is most likely going to be muted, with few catalysts in the foreseeable future. The move to a car-lite society has also weighed heavily on the company and will continue to curb its growth.
VICOM’s 2018 dividend payout ratio of 120% is also not sustainable and I expect the company to start lowering its dividend payout ratios to more sustainable levels within the next few years.
Lastly, its high valuation and the availability of other options in the market convinced me that it was time to finally part ways with the company to free capital for more attractive investments.
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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 contributor Jeremy Chia owns shares in Sasseur Real Estate Investment Trust and DBS Group Holdings Ltd. The Motley Fool Singapore has recommended shares of VICOM Limited, Frasers Centrepoint Trust and DBS Group Holdings Ltd.