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Tug-of-Fools: VICOM – The Bear Argument
Corporate Digest | 26 March 2015
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By Chin Hui Leong


Charles Darwin regularly tried to disprove his own theories, and the scientist was especially sceptical of his ideas that seemed most compelling. The same logic should apply to investment ideas.

– Morgan Housel,

Before we start, I have a confession to make: I own VICOM shares. So, what am I doing writing a bear thesis? Well, I am also a believer of listening to all sides of an investment story – the good, the bad and what is in-between.

In my opinion, Foolish investors are better served when they are able to go into an investment with awareness of potential risks and rewards.

With that in mind, let us lay down our rose-tinted glasses for a moment, and put on our bearish hats, shall we?

Slower Growth

According to an AmFraser report, about one-third of VICOM’s revenue comes from its vehicle inspection segment, which relies on the number of vehicles flowing through the company’s vehicle inspection centres.

Realistically, there will be a finite limit on the number of cars on Singapore’s roads. From the graph below, we can see that the rate of growth in the number of motor vehicles in Singapore is slowing over time – that may eventually affect the revenue growth of VICOM’s vehicle inspection business segment.

Sure, there is the possibility of charging higher inspection prices but still, one tailwind (more vehicles) for VICOM may be more subdued in the future.


Source: Land Transport Authority of Singapore


Lower Margins

The non-vehicle inspection segment at VICOM makes up the other two-thirds of the company’s revenue, according to AmFraser. Although sales for this segment may continue to grow, it may come at the expense of lower profitability.

Unlike its vehicle inspection segment’s market-leading position, the non-vehicle inspection segment faces more competition. This could translate to lower operating profits.

We can see this from the last-known official business segment breakdown provided by VICOM in 2011.


Source: VICOM


As such, it is possible that the overall net income margin for VICOM may decrease in the future if the non-vehicle inspection segment makes up a larger piece of the overall revenue pie.

High Dividend Payout, Slower Dividend Growth In The Future

Shareholders of VICOM have enjoyed years of increasing dividends. However, we should note that the dividend pay-out ratio (ratio of dividend against net income) has been creeping up over time. This is seen in the chart below.


Source: VICOM


What this means is that the growth in dividends may be less steep than before.

Historically High PE

Despite revenue growth slowing over the past few years (from 8 percent in 2011 to just 3 percent in 2014), shares of VICOM have been trading at an elevated trailing price-to-earnings (PE) ratio. As of 22 March 2015, the trailing PE ratio for VICOM was 19.2. As you can see in the chart below, that is substantially higher compared to the firm’s historical trading range.


Source: S&P Capital IQ


This presents a valuation risk in the sense that VICOM’s shares could fall if its underlying business growth was to stall.

So, the question is, can VICOM continue to grow at a reasonable rate over time to justify its current share price? Only time will tell.

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VICOM  7.680 +0.01 +0.13%   
Business: Co is a leading provider in technical testing and inspection svcs.

Insight: Feb-19, FY18 revenue inched up 3.1% to $100.1m due... Read More

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