Vicom Ltd - CGS-CIMB Research 2020-03-13: Roadworthy

VICOM LTD (SGX:V01) | SGinvestors.io VICOM LTD (SGX:V01)

Vicom Ltd - Roadworthy

  • Vicom (SGX:WJP) is Singapore’s largest vehicle inspection service provider with 74% market share in 2018, according to its annual report.
  • Management expects stable growth for its vehicle inspection segment in FY20F, due to more private car owners renewing their COEs.
  • Net cash position with FCF generation of c.S$30m/annum over the past 5 years.
  • Vicom currently trades at 23.9x TTM P/E and historical div yield of 5.0%.

Singapore’s largest vehicle inspection company

  • Incorporated in 1981, Vicom Ltd. is Singapore’s leading provider of inspection and technical testing services. According to its 2018 annual report, the company has a 74% market share of the vehicle inspection services market in Singapore (by number of vehicles).
  • Vicom is a subsidiary (67.1% owned) of ComfortDelGro (SGX:C52).
  • Vicom’s inspection & testing segment is categorised into two parts:
  • Vehicle inspection, which includes inspections, assessments, and testing for vehicles.
  • Non-vehicle inspection, which includes the provision of inspection, consultancy and training services for sectors such as the aerospace, marine and offshore, biotechnology, oil and petrochemical, building construction and electronics manufacturing industries. This segment is operated by the company’s wholly-owned subsidiary SETSCO Services.

Vehicle inspection

  • The periodic vehicle inspection regime in Singapore ensures that vehicle owners maintain their vehicles regularly to meet roadworthiness and emission standards, thus minimising vehicular breakdowns and road accidents.
  • Car owners have to get their cars inspected for emissions and safety every other year beginning from the third model year. They are also required to be inspected every year after 10 model years. On the other hand, motorcycles must be inspected annually beginning from the third model year. Taxis, buses, trailers, and commercial vehicles must be inspected either annually or semi-annually depending on the vehicle’s age. To renew a vehicle’s road tax, the inspection needs to be up to date.
  • A comprehensive roadworthiness inspection will include the following checks:
    • Wheel Alignment Test,
    • Brake Efficiency Test,
    • Headlight Test,
    • Exhaust Emission Test,
    • Engine Noise Check,
    • Structural Integrity Check, and
    • Under Carriage Inspection.
  • For diesel-driven vehicles, there will be an additional Chassis Dynamometer Smoke Test.
  • There are currently 9 LTA authorised inspection centres (AIC) operated by Vicom, JIC Inspection Pte. Ltd. and STA Inspection Pte. Ltd. Besides 5 self-operated centres, Vicom also holds 78% stake in JIC (which operates 2 AICs), essentially controlling 7 out of the 9 AICs available in Singapore. Based on online checks, inspection fees for all nine inspection centres in Singapore (Vicom, JIC or STA) are the same.
  • In addition to its vehicle inspection services, Vicom also provides motor insurance, road tax renewal, in-vehicle unit (IU) maintenance, vehicle evaluation, accident vehicle assessment and vehicle emission certification and vehicle repair services at approved workshops.

Non-vehicle inspection (SETSCO)

  • Setsco is one of Singapore’s largest test and inspection companies accredited by the Singapore Accreditation Council. It offers a comprehensive range of testing, calibration, inspection, certification, consultancy and training services to a list of diverse sectors, such as oil & gas, aerospace, marine, food, pharmaceutical, petrochemical, electronics, environmental, and construction. Its services include quality assurance testing and evaluation of building materials, structural and chemical analysis, food and microbiological analysis, environmental monitoring, amongst others.
  • Notable jobs secured by Setsco in 2018 include:
    • Building and Construction Authority’s contract to test essential building materials prior to use at construction sites in Singapore;
    • the North South Corridor Project to test concrete and steel materials; the Changi Terminal 5 Package 2 project to conduct soil testing;
    • several turnaround jobs from Petrochemical plants; and
    • projects involving testing of water for clients such as the Public Utilities Board and Micron Technology, Inc.
  • Besides Inspection and Testing services, SETSCO has also broadened its scope in the Certification space. SETSCO was one of the three assessment bodies appointed by the Infocomm Media Development Authority and the Personal Data Protection Commission to conduct independent audit of firms which wish to apply for the Data Protection Trustmark Certification.

Industry background

  • Singapore’s vehicle population growth has been stagnant in recent years, as government continued its push towards a car-light and more environmentally friendly society. In 2018, the government introduced a “zero-growth” policy for passenger cars and motorcycles (took effect in Feb 2018), and announced that the growth rate for commercial vehicles will remain unchanged at 0.25% per annum till the first quarter of 2021 to provide businesses more time to improve the efficiency of their logistics operations and reduce the number of commercial vehicles that they require.
  • There are also various schemes to encourage early scrapping of older and more pollutive vehicles. However, according to LTA, the number of COE revalidation continued its spike which began in 2015. This resulted in an ageing of Singapore’s car population. As of 2019, cars older than 10 years made up 21.1% of the population, significantly higher than 3.7% in 2009. According to a Straits Times article in Jun 2019, the trend of increasing COE revalidations came because renewing COE is a lot more economical than buying a new car in terms of annual depreciation, and consumers were choosing to extend their COEs because of a gloomier macroeconomic outlook and uncertainty.
  • Also, more Singaporeans are beginning to see the car as just a means of transport. There is also less need for a car, as public transport services have improved of late.

Management outlook

  • According to Vicom, the Singapore economy is likely to be negatively impacted by Covid-19 in 2020F. Management expects the vehicle testing business to remain stable, as more than 39,000 private cars renewed their COE in 2019, and these cars will henceforth be subjected to mandatory annual instead of biennial inspections.
  • However, the non-vehicle testing business is expected to remain challenging given the economic uncertainties, according to Vicom.


Revenue, margin and profitability

  • Vicom’s revenue fell during FY15-17, as its vehicle testing segment was hit by higher deregistration of cars, while its non-vehicle testing segment was hurt by a slowdown in industries it serves.
  • Revenue started to show recovery in FY18 helped by the non-vehicle testing segment, as industries served by Vicom showed signs of recovery. Vehicle testing segment continued to be hurt by a drop in transaction volume due to premature scrapping of cars, offset by higher demand for new tests and more stringent testing requirements including a new High/Low Idle test introduced in Apr 2018.
  • Vicom recorded 3.6% revenue growth in FY19 due to a slowdown in the deregistration of older cars, which resulted in stronger demand for vehicle inspection.

Cash flow

  • Vicom has been generating positive free cash flow for the past 10 years. The company is backed by consistent operating cash flow while capex requirement has been generally low at c.S$5m p.a..

Balance sheet

  • In line with the group’s consistent free cash flow generation, Vicom’s net cash position improved from S$49.1m in FY10 to S$107.5m in FY17. Net cash position started to decline slightly since FY17 as the company increased its dividend payout ratio to c.120%.


  • In 2017, Vicom’s board raised its dividend payout policy to 90% of its net profit attributable to shareholders as dividends (previously: 50%). The board committed in AGMs that as long as the company does not require extra cash, they shall return it to shareholders.
  • Since 2017, Vicom has been paying out c.120% of its net profit as dividend. Total dividend declared in FY19 amounted to 38.4 Scts, which translates into a dividend yield of 5.0% based on the current price of S$7.65.

Historical valuation

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-13
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