Vicom Car Inspection

For those who have not been seen a Vicom car inspection, the following two videos will help:

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Tight COE supply bodes well for Vicom

I read an article in the Straits Times today that the tight COE supply might make the sales of used cars to hit a 10-year high in Singapore.

In the first quarter of 2011, 15,441 cars changed hands and this figure is more than twice the 6,896 new cars sold (click on hyperlink to see figures by LTA). The number of used-car transactions is likely to hit a 10-year high at this rate. Some industry players predict that the growth will continue over the next two years due to the short supply of COEs. This has driven up premiums and hence, the prices of new cars. The number of COEs is expected to hit rock-bottom between this year and 2013.

I feel all the above figures bode well for Vicom as they derive income from vehicle inspection of motor vehicles. Motorcars three to ten years of age have to go for vehicle inspection biennially. Looking at the age distribution of motor vehicles, the age of cars between three to less than six years makes around 53%, the bulk of the percentage. I’m sure this particular trend will continue to increase in the coming years with the tight COE supply. Vicom, having a duopoly in the vehicle inspection arena, is in good stead to capitalise on this trend.

Vicom FY2010 Analysis

Vicom just released their FY2010 results on 10th Feb. As usual, their results are positive.

Their revenue, gross profit margin, net profit and net profit margin have all increased over the previous year. Revenue increased 7.7% and net profit increased 9.9% over the previous year. Their net profit margin is at the highest at 26.6%. This shows that Vicom has a viable business model producing outstanding margins.

Looking at their balance sheet, they have $49 million in cash with no debt at all! Vicom is a business that generates a substantial amount of cash every year.

Their current ratio is at 2.5. Even though this is good (current ratio is >1), I feel that the current ratio is on the high side. It would be beneficial if Vicom uses the cash to expand the SETSCO subsidiary which is facing high competition or acquire other businesses like STA Inspection Pte Ltd (STAI) to monopolise the vehicle inspection industry. Currently, the vehicle inspection industry is operating in duopoly with Vicom and STAI as the only two inspection companies in Singapore. If the company is not using the cash to expand/acquire companies, it could pay out more dividends than the 9.8 cents declared (6.6 cents final dividends + 3.2 cents special dividends). The current ratio will go down to 2.12 after giving away the 9.8 cents dividends, which I consider is still slightly on the high side.

The ROE is above 20% but has dipped slightly compared to the previous year. This might be attributed to the high amount of cash in the company’s coffers. The ROA has slightly dipped as well. Retained earnings has increased around $13 million compared to last year. Equity has also increased compared to previous year.

Looking at the cash flow statements, cash flow from operations dipped around $2 million or around 6.7% compared to the previous year. This can be attributed mainly to the increase in “Other Receivables and Prepayments” due to the GST receivable for the lump sum payment of land lease renewal at Sin Ming. Average free cash flow also dipped due to increased capex for FY2010.

Dividends paid has been consistently increasing. With a very positive free cash flow generation, Vicom is a cash cow that pays good dividends.

Looking at the individual business segment, revenues from vehicle inspection and non-vehicle testing and inspection both increased. These segments contributed to around 91% of the FY2010 revenue. The outlook from Vicom for these sectors are: “Given the current high cost of COE, the rate of vehicle de-registration for 2011 is expected to remain depressed, resulting in more vehicles being due for inspection. The test & inspection business will continue to face competitive pressures”. I have the same sentiments as the company. The company should look into increasing the economic moat of the SETSCO business. The SETSCO business is operating in a highly competitive industry unlike the vehicle inspection sector.

Overall, I’m very impressed with the FY2010 results due to the increasing margins and cash.