VICOM Ltd - Resilient business with formidable balance sheet

Initiating coverage on VICOM with BUY, TP $6.28. VICOM Ltd has a balance of pro-cyclical and anti-cyclical business segments. Vehicle inspection (anti-cyclical) provides for earnings stability while investors may particpate in economic cycle recovery provided for by its subsidiary SETSCO Services.

Reslient income stream
Mandatory vehicle inspections have to be conducted at any of the 9 inspection centers in Singapore. With 7 centers strategically located across Singapore, VICOM captures more than 70% of the market share. Higher COE prices may extend the useful life of a car, thereby increasing the need for VICOM's services. Furthermore, regulatory changes such as stricter emission standards and the Lemon Law may boost demand for VICOM's vehicle ancillary services.

Promoting the value of accreditation
SETSCO provices independent testing, inspection, calibration and certification services for companies across multiple industries looking to enhance consumer confidence. Increased focus on compliance with regulatory requirements and conformance to international standards will drive growth of SETSCO Services.

Strong track record
VICOM operates mainly in Singapore, but has achieved remarkable growth in both top-line and bottom-line. In the last ten years, revenue grew at CAGR 9% while net income expanded at a pace of 14%. As long as Singapore continues to attract capital-intensive industires, SETSCO should continue contributing positively to VICOM.

Technical Analysis
Daily Chart
Sustainable dividend yield
VICOM has been paying out more than 60% of its earning in the last 2 years. Despite the bonus payout, the cash-rich company is able to consistently grow its cash holdings - debt free balance sheet at CAGR 24% in the last 5 years through FY12. Moveover, income growth has been growing in the last 10 years.

Valuation at $6.28 using Discounted Dividend Model represents an upside of 26% from VICOM's current share price. Our target price translates to 18.4x forward earnings, which is still cheaper than foreign-listed peers average of about 20x PE. (Read Report)

Source : AmFraser Research

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