Thursday, November 13, 2008

Valuable Vicom

Long time ago, I mentioned about Vicom being a prime candidate for value at around $1.50, fully unaware that it will hit around $1.50 so soon this year. At the lowest, Vicom was trading at around $1.30 near end of Oct 2008. They just announced their 3Q results today.

Here are the main ratios for Vicom over the last 9 months:

Gross margins--------28.8%-----------29.3%
Net margins-----------23.0%-----------23.4%
ROE (annualized)-----25.6%-----------25.1%
Current ratio------------1.57-------------1.35
Total debt/equity-------34.5%----------30.4%

NAV for FY07 is $0.70, for 9M08 is $0.7532. This means that it’s trading at around 2x NAV at current price of $1.53 at last closing.

For the past 9 months in the FY08, Vicom earns a PATMI per share of 14.89 cts per share. In a non linear world, let’s just take a linear assumption that everything can be projected in a straight line to 4Q08 – that gives us a PATMI per share of 19.8 cts per share. Last closing price for Vicom is at $1.53 on 11th Nov, giving us a PE of 7.7x. Historical PE might not mean much in these extraordinary times, but I feel we have to put the 7.7x PE in perspective. Past PE of Vicom range from 6.8 times to 7.3 times from FY2004 to FY2007.

I did a valuation for Vicom before. It ranges from $2.2 to $2.8 over a period of 10 years. At 1.53, it gives us a paltry CAGR of 3.7% to 6.2%. But as I think the real attraction lies in the dividend. FY2007’s dividend is around 15.5 cts per share. Assuming no change in dividends over the next ten years, and without growth in dividends, we’ll get back $1.55 in ten years time, just based on dividends alone. This means a 0% growth in dividends over the next 10 years. Historical CAGR of dividends growth is 50%, with FY06 to FY07 increase in dividends per share (special dividends included) of 29 %.

You might want to check this out:

Per share data:

-----------Div without specials---------Div with specials
FY04----------4.6 cts-------------------------4.6 cts
FY05----------5.2 cts-------------------------6.8 cts
FY06-----------7.9 cts------------------------12.0 cts
FY07----------15.5 cts------------------------15.5 cts

15.5 cts per share at $1.53 means a dividend yield of 10.1% - a good rate anytime.

Business wise, their segmented breakdown of business as a % of revenue are as follows in 9M08:

Vehicle inspection business – 30.6%
Vehicle assessment business – 3.6%
Test / inspection services – 59.2%

This segmented breakdown of their business to their revenue is more or less the same as their FY07 results. Their main business is still the test / inspection service which makes up nearly 60% of their total revenue, which shows an increasing trend over the years. Vehicle assessment business will continue to drop as their monopoly status on this business is removed by regulation. Test/inspection services in SETSCO will thus continue to be their growth engine, followed by their vehicle inspection business.


Seems like quite a nice combination of factors that make Vicom attractive to me again. I like the high dividend yield of 10% - even if it cuts the dividend to FY06 level, it’ll be around 7-8%, which is pretty decent to me. What is more attractive to me is that this company got pretty good cash flow, decent margins, low debts and boring business – quite a cash cow in my opinion. If they only hold on to FY07’s dividend and continue paying at the same rate without any growth over the next ten years, I would have gotten the cost of the share for free – I thought that the downside is pretty much covered. And we haven’t talk about the likely capital gains. Or the likely growth in dividends given. If the wind is behind the sails of Vicom, we might be even getting back our cost of the shares much earlier than 10 years.

There might be some issues at buying or selling the shares. As the float is quite low, there is always a wide spread in the bid/sell queue. I think this is like singpost kind of company.

Is this the best use of my cash?


Mike Dirnt said...

hi LP,

been a long time i last read your postings. sad to hear about your past experiences. i believe everyone have gone through similar events probably at even greater scale. its good to come out stronger than previously.

as for me, i got a fair share of bad debts to writedown. all add up to probably a few k and maybe another near 10k of realised losses from stocks, unit trusts and edownment plan.

so still waiting for vicom? :) you may want to take a look at SATS. another similar stock with good cashflow, low debt, dividend play but with presence around the globe

la papillion said...

Hi Mike,

Thks for visiting :)

No longer waiting for vicom because I think there's something funny with buying a company because of the dividends. It's somehow isn't the kind of investment philosophy that I had in mind. What if the dividends cut, do I still want that company? I think dividends is part of the perks that the company gives as a result of growth and their earnings, hence I would still buy a company due to its growth and earnings, not solely due to dividend.

Somehow, I don't think vicom makes the cut. Thks for ur recommendation on SATS, will take a look at it :)

Mike Dirnt said...

Hi LP,

i agree with your argument. but even the greatest investor like warren buffett mentioned his criteria is one that has a track record of dividends payout.

as for growth companies, we can look at companies past and analyse its growth. but the future growth may or may not be guaranteed as well and can be suddenly affected by some systematic risk that we are facing right now.

however a company with a good moat like smrt, vicom or some other transportation, utlities, medical companies, their cashflow is more or less guaranteed. they dont necessarily need to grow anymore but certainly their cashflow is not disrupted during bad times as people still need to take transport or go hospitals as for the medical sector.

as far as i can think, future growth is less uncertain than future dividends payout.

anyway my philosophy is still the same, i hold a collection of whatever stocks, be it growth, dividend, trusts, reits, etc :P

Anonymous said...

Good analysis. They seem to be debt did you compute a debt equity of 34.5%?

la papillion said...

Hi Bala,

Oh, I attached a 3Q results in the post as well. It's in one of the links in the first paragraph.

If you click on that, you'll see that in the balance sheet on page 3 of 13, there is a current liabilities of 21,876k in the 3Q08. Add this to a non-current liabilities of 936k, we have a total debt of 22,812k. Total equity stands at 66,041k.

So total debt/equity is 0.345 (22812/66041 = 0.345) or 34.5%. Of their capitalisation, only 25.7% consists of debts (most of which are short term liabilities).

You'll notice that the quality of their liabilties are geared towards short term liabilities. They have rather negligible long term debts (no bank borrowings, no notes payable, only tax liabilities), which is great.

In light of this, the current ratio is a better gauge of their solvency. At 1.57, it's excellent.