5 Key Updates On VICOM Ltd’s 2017 Annual Report

VICOM Ltd has always been a well-liked stock among dividend investors. The company is a listed subsidiary of Straits Times Index’s constituent, ComfortDelgro Corporation Ltd. It is the leader in vehicle inspection in Singapore, controlling about 75% of the entire market. It also operates a non-vehicle inspection and testing division through Setsco Services.

VICOM has been a consistent dividend payer throughout its history and tends to have a high dividend yield of more than 5%. However, from its latest annual report, we are seeing signs that its high dividend might not be as sustainable as we think.

Here are 5 key updates you need to know from VICOM Ltd’s annual report.

Revenue Decline

Revenue of VICOM Ltd is under pressure. Mainly due to the declining vehicle registration in Singapore and the government policy of moving towards being a “car-light” nation, VICOM sees its revenue dropping around 2% a year from S$105 million in 2013 to the current S$97 million (2017).

Structurally, it does not seem that there is much growth left in this segment of the business. The company can continue to grow its non-vehicle inspection and testing division. Yet looking at the past four years, it seems it might not be growing fast enough to offset the decline in its vehicle inspection business.

This is extremely important because it is showing that the company might be facing a structural decline in its business model.

Net Profit Decline

Aligned with its revenue drop, its earnings per share has also been dropping at about 1.8% per annum from 2013 to 2017. Although the company is still both its revenue and net profit declining, interestingly it is still maintaining its profit margin at around 27%. It does show some positive signs that the company is able to operate in a cost-efficient manner.

Dividend per share increase

Interestingly, VICOM Ltd saw a rise in its dividend per share from 22.5 cents in 2013 to 36 cent in 2017. This comes as the management increased the payout ratio of the company from 50% to 90% of net income.

However, the payout in 2017 was higher than its net income which begs the question if the company has sustained the dividend going forward if the company is not able to grow.

Its Free Cash Flow Is Showing…

Although VICOM is paying out more than 90% of its net profit as dividend, there might be signs to show that the dividend rate might actually be sustainable. This is because, from its cash flow statement, it shows that the company has been paying out less than its free cash flow amount over the last 2 years.

This means that VICOM Ltd would be able to sustain the dividend even without much growth in the company. Moreover, we are able to see that the company spends very minimally in terms of capital expenditure in the business. Again, this could show that the company is running out of growth and there is not many areas the management can reinvest its cash in, and thus resulting in their decision to raise the dividend rate.

Cash Rich

Lastly, VICOM Ltd is a company with the very strong balance sheet. Given that it has a net cash position of more than S$100 million in its balance sheet and only spends around S$28 million in the dividend, the company should have enough to payout even if it is not making any money.

What can we expect from VICOM?

So what can we expect from VICOM going forward? It seems that the company should continue to be a high dividend stock for its investors. With a dividend yield of close to 6% at the moment, it is one of the highest yielding stock on the Singapore market.

However, it seems that the company might be starting to see a structural decline in its core business of vehicle inspection. Although there is no immediate threat to its dividend payout, that dividend could potentially be reduced in the future.

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Stanley Lim, CFA

Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer of the investment book: “Value Investing In Asia”, published in 2018. Stanley is currently the chief editor of Value Invest Asia.

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