I first read about VICOM as I was re-building my portfolio in 2015. Looking at its past record, I lamented that it was another counter that I have missed over the past decade of investing. Nevertheless, I found it to be a simple and cash generating business and decided to take a stake in it, thinking that its price has factored into the increase de-registration of car for the next few years.
Apparently, the market did not think so and its share price continued to drop and I divested completely in 2016, making a loss of 3% after accounting for dividend received. It continued to stay in radar but I did not buy into it as there is a continued worry of its sustainability of its dividend.
I decided to buy the counter again due to its announcement of its new dividend policy of paying out 90% with immediate effect in its Q2 result. This provided me with a higher certainty that its dividend will more or less be sustainable in the next few years even as revenue and net profit will continue to slide with the decrease in its vehicle inspection due to the increase in car de-registration.
Of course, it has been paying out 80+% in the past two years, hence it is not such a big increase. However, I think by putting in writing 90% payout, I am thinking it might pay out even more especially when it is a cash generating business.
From the data, the increase in de-registration should continue into 2019 with an increase in vehicle inspection from 2020. With COE continued to stay high for the past year, there is also an increase in COE renewal. Not sure how all these will pan out in the next few years, but I think it might stabilize the number of vehicles requiring for inspection.
VICOM also has a non-vehicle inspection business SETSCO. From a report from The Fifth Person done in 2015, SETSCO actually accounted for 60% of its revenue. Unfortunately, in the recent annual reports, VICOM no longer provides segmental report of its business. In the latest annual report, it is reported the SETSCO experienced a difficult year in 2016.
All the above factors and its strong balance sheet which has about $1.08 per share gives me confident that the company can maintain its dividend for the next few years before the upturn in its business again.
Near to zero movement in its price until pre- and post- dividend. A dividend in the range of 26 cents for 2018 and 2019, giving me a yield of 4.5%. From 2020 onwards, its dividend should increase together with its revenue and profit. Its share price might follow with that.
Possible catalysts include an increase in dividend payout, an increase in car inspection fees (the last increase was in 2012) and better performance by SETSCO amid the challenging environment.
If there is a steep drop in dividend, reducing the yield to less than 4%, I will probably switch out of the counter.