Vicom Ltd has just released their FY results yesterday evening which I thought was decent.
Results Highlight
Vicom’s revenue grew 8.1% year on year to $105m while profits grew 7.7% higher at $28.4m.
Considering the company’s activity slowdown in the past year, this is decent numbers we are talking about.
The company’s cash flow from operations (CFO) has increased by about 7% to $32.5m while Free Cash Flow (FCF) for the year was at $28.6m. The management has declared a higher final and special dividend for the year at $0.081 and $0.064 compared to $0.075 and $0.032 respectively in 2012, giving a 23.6% increase in dividend growth year on year. Dividend payout remains at slightly below 60% for the year which means that the company gets to retain the rest of the $12.5m which flows back to cash in the balance sheet.
The company has been growing their humongous cash equivalent which now stands at $78.5m (that is more than 50% of the total assets they own). With the company being debt-free, it will not be subject to any interest rate risk that investors have been so worried about in the market. The worry would come more from the operational outlook which I will explain more in the later section.
Outlook
Management has given guidance that in the next 12 months, demand for the vehicle testing services is expected to moderate as more vehicles are expected to be deregistered in the year. For the non-vehicle testing services, demand is expected to grow despite the keen competition.
Thoughts
Based on the annual report 2012, we know that the number of vehicle testing from Vicom amounted to 505,123 while LTA figures came to 687,484. This gives a rough 73% market share (505,123/687,484) for Vicom for its vehicle testing service. With this being the core drivers of Vicom’s business, a dip in the number of vehicle testing demand services will reduce the company’s earnings, all things being equal.
A Finance Professor I had in my class always said to us “What is expected will be priced”.
The question for Vicom becomes how many vehicle inspection demand dip are we expecting. Let’s look closer.
| Year | No. of Vehicles Inspection (by LTA) | % Growth |
| 2008 | 530,894 | - |
| 2009 | 566,358 | 6.7 |
| 2010 | 621,889 | 9.8 |
| 2011 | 666,842 | 7.2 |
| 2012 | 687,484 | 3.1 |
| 2013 | 697,870 | 1.5 |
| 2014 | ? | ? |
Based on the past 6 years data, it appears that the total number for vehicle inspection has increased, albeit at a decreasing growth rate over the years. This is not surprising given that on the 13th Jan 2014, LTA released a statement which states that with generally rising vehicle de-registration numbers in recent months and with the trend likely to continue until about 2016, it seems that total number of vehicle inspection growth will slow down, with the two being correlated together.
| Year | No. of Vehicles Deregistration under VQS (by LTA) |
| 2003 | 109,710 |
| 2004 | 114,870 |
| 2005 | 117,461 |
| 2006 | 104,809 |
| 2007 | 81,555 |
| 2008 | 77,920 |
| 2009 | 58,102 |
| 2010 | 40,707 |
| 2011 | 36,980 |
| 2012 | 34,349 |
| 2013 | 41,501 |
With that being said, I do not forecast a huge drop suddenly in Vicom’s earnings. Assuming a flat growth in the vehicle testing services in 2014, the growth would probably come from the non-vehicle testing services which are expected to grow. The question then becomes what should investors do with Vicom not only in 2014 but in 2015, 2016 and beyond.
Conclusion
Some investors have expressed disappointment at the final and special dividends announced by Vicom yesterday. Even though dividend has grown 23.6% year on year, investors were still expecting more given the huge cash hoard they currently have in their balance sheet.
To me, I think the company is holding onto their cash in anticipation for future slowdown in their businesses. Even with the slowdown, I expect the company should still be able to generate more than $16m of earnings comfortably, which means I do not foresee the dividends to drop anytime soon. At the worst scenario, they can dip into their cash holding to pay out the $0.225/share dividends to investors.
At current price of about $5.66, it is yielding at about 4% while PER is around 17.5.
For me, I will be holding on for the shares at the moment while enjoying the decent 4% dividends and the $78.5 cash hoard the company has.
