Why I’m Excited to Reinvest in Vicom Now

With expenditure coming in lower than anticipated for the first half of the year, I now have the opportunity to reinvest a portion of my portfolio’s cash.

As I have recently beefed up my position in HRnetGroup Ltd (SGX: CHZ), Frasers Centrepoint Trust (SGX: J69U) and Parkway Life REIT (SGX: C2PU), and Venture Corporation (SGX: V03), I was looking for another income counter to invest in.

I also wasn’t looking to add more Singapore banks, given their relatively higher price and larger positions in my portfolio.

After browsing through some familiar names, Vicom Ltd (SGX: WJP) caught my attention. Having invested in the stock before, I am already familiar with its business.

For most Singaporean drivers, Vicom needs no introduction. If you drive a car, you are likely to have visited one of its inspection centres, as Vicom commands more than 70% of the vehicular inspection market.

The other segment, non-vehicle testing, operates with a high degree of confidentiality. Despite this limited transparency, based on the minutes from the latest AGM, the segment remains profitable and its return of equity (ROE), while not as high as the vehicle segment, was reasonable.

So, what has compelled me to reinvest in Vicom, a company I divested from five years ago?

Why Buy?

Here are the reasons for my decision to take a small stake.

1. Resilient business
2. Sustainable dividends
3. Reasonable price

Let’s delve into each of these points in more detail.

Resilient business

Being a duopoly in the vehicle inspection sector, and with the major market share, provides Vicom much visibility for its business. While there’s no further breakdown of its non-vehicle testing segment, its contribution to overall profitability underscores its value.

This resilience is evident from the strong set of numbers it achieved for the past five years, as shown in the image below.

While the growth in its revenue and earnings are not spectacular, compounding annually at a rate of about 8.4% and 4.6% respectively over the five years is respectable. Furthermore a ROE of around 20% is nothing to scoff at, especially when it doesn’t carry any debt in its book.

The momentum continues into 1Q 2025, where its top and bottom lines grew by an impressive 18.9% and 7.5% respectively.

Additionally, it generated almost S$11 million of cash from its operating activities, resulting in an increase of its cash and equivalents to S$65 million.

This strong financial position means Vicom has the means to fund a significant increase in capex of about S$50 million, as guided by management, for FY2025. This capex is primarily for the development of the new Jalan Papan site, crucial for replacing the Pioneer vehicle inspection centre, whose lease has expired in November 2024.

More importantly, this strategic investment will drive the company’s future growth by enabling new, higher-value testing services for its non-vehicle segment, such as electric vehicle (EV) battery testing, sustainable construction materials, and other advanced testing capabilities.

Sustainable dividends

You might be wondering if Vicom can sustain its dividends (S$0.058 per share for FY 2024) this year, given the huge capex.

While it’s not guaranteed, based on its strong operating cash flow, robust cash holdings, and dividend policy of paying out at least 70% of its earnings, it should not be an issue.

What is likely to happen is that the company will see a decrease in its cash and equivalents for FY 2025.

However, this will be temporary.

With capex normalising from FY 2026, Vicom should see an increase in net cash flow in subsequent years. Consequently, there is potential for higher dividends from FY 2026 onwards, even if it maintains its current dividend policy.

Reasonable price

I wanted to say that my decision is based only on its future prospects. But the truth is having sold it at S$8.11 (pre 1-to-4 split) five years ago, I feel that I am getting a bargain today. This is especially so when my average purchased price then was S$6.14 (equivalent to S$1.53 now).

Beyond that subjective feeling, I truly think that the current price of S$1.43 provides a reasonable entry point. Not only does it offer a decent dividend yield of 4%, but there is a good chance of both capital appreciation and higher dividends in the future.

In fact, I am more excited about investing in Vicom today than I was with my previous investment.

Back then, it was just a steadfast, cash-generating company, returning its excess capital to the shareholders. Now, beyond its steady vehicle-testing business, Vicom has a clear growth driver that could potentially generate even more returns for the shareholders in the next decade.

It’s this dynamic evolution that fuels my renewed excitement for this investment.

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