VICOM L TD
LAST LOSE S$5.00
FA * VALUE S$6.28
Resilient business with formidable balance sheet
Initiating coverage on VICOM with BUY, TP $6.28. VICOM Ltd has a balance of pro-cyclical and anti-cyclical business segments. Vehicle inspection (anti-cyclical) provides for earnings stability while investors may participate in economic cycle recovery provided for by its subsidiary SETSCO Services.
Resilient income stream. Mandatory vehicle inspections have to be conducted at any of the 9 inspection centers in Singapore. With 7 centers strategically located across Singapore, VICOM captures more than 70% of the market share. Higher COE prices may extend the useful life of a car, thereby increasing the need for VICOM’s services. Furthermore, regulatory changes such as stricter emission standards and the Lemon Law may boost demand for VICOM’s vehicle ancillary services.
Promoting the value of accreditation.SETSCO provides independent testing, inspection, calibration and certification services for companies across multiple industries looking to enhance consumer confidence. Increased focus on compliance with regulatory requirements and conformance to international standards will drive growth of SETSCO Services.
Strong track record. VICOM operates mainly in Singapore, but has achieved remarkable growth in both top-line and bottom-line. In the last ten years, revenue grew at CAGR 9% while net income expanded at a pace of 14%. As long as Singapore continues to attract capital-intensive industries, SETSCO should continue contributing positively to VICOM.
Sustainable dividend yield. VICOM has been paying out more than 60% of its earnings in the last 2 years. Despite the bonus payout, the cash-rich company is able to consistently grow its cash holdings—debt-free balance sheet- at CAGR 24% in the last 5 years through FY12. Moreover, income growth has been growing in the last 10 years.
Valuation at $6.28 using Discounted Dividend Model represents an upside of 26% from VICOM’s current share price. Our target price translates to 18.4x forward earnings, which is still cheaper than foreign-listed peers average of about 20x PE.