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Eight lessons from 11 years of owning VICOM

Car Inspection Checklist
Car Inspection Checklist

If you own a car or motorcycle in Singapore, then you will probably have heard of VICOM Limited (SGX: WJP).

VICOM, which stands for “Vehicle Inspection Company”, was incorporated in 1981 and listed in 1995.

The group’s testing and inspection business extends beyond vehicles and includes other fields such as civil engineering, biochemical, and mechanical.

Parent company ComfortDelGro Corporation Limited (SGX: C52) owns slightly more than two-thirds of VICOM.

As an investor since August 2011, you learn a thing or two after holding the shares for over a decade.

1. Slow and steady wins the dividend race

VICOM is not the most exciting business but it can hold its own when it comes to growth.

Back in fiscal 2003, the firm generated revenue of S$47.8 million.

Fast forward to 2021, and revenue has more than doubled to S$100.9 million.

In other words, over the last 18 years, VICOM’s revenue has grown at a compound annual growth rate (CAGR) of 4.2%.

Net profit did slightly better, jumping from S$8.2 million to S$24.8 million over the same period for a CAGR of 6.3%.

The business also generates a lot of cash, supporting an increase in annual dividends from S$0.01575 in 2003 to S$0.0828 in 2021, for a CAGR of close to 10%.

2. An increase in vehicles inspected

The steady increase in revenue and net profit came about as the number of car inspections rose alongside Singapore’s growing car population.

From 2006 to 2021, vehicle inspections increased from 335,890 to 523,639 for a CAGR of 3%.

Back in 2006, the group had a 73.1% market share of the vehicle inspection market.

This share increased to around 75% by 2021.

Currently, VICOM boasts 35 inspection lanes located in seven centres around Singapore and employs 850 staff as of the end of last year.

Its sole competitor is STA Inspection Pte Ltd, a wholly-owned subsidiary of Singapore Technologies Engineering Limited (SGX: S63), with only three locations in Singapore.

3. VICOM has a non-vehicle inspection business

VICOM has a non-vehicle inspection segment called Setsco.

Setsco has three decades of experience as one of Singapore’s largest test and inspection companies.

The division was acquired for S$15.7 million in 2003 from Keppel Integrated Engineering, a unit of Keppel Corporation Limited (SGX: BN4).

That year, Setsco generated S$22.5 million of revenue with S$1.7 million of segment profit for a 7.6% segment margin.

By 2011, Setsco was generating S$55.1 million of revenue with S$10.6 million in operating profit, for a segment margin of 19.2%.

These numbers demonstrate that VICOM’s purchase of Setsco was a good decision, as both revenue and operating profit have increased significantly in just eight years.

4. Older cars on the roads

Looking ahead, we should expect a larger population of older cars on the road.

The Singapore government has set a zero-growth rate for vehicles since 2018 due to land constraints.

As it stands, this policy has been extended until 31 January 2025 to curb the growth of the vehicle population, leading to more older vehicles on the road.

For VICOM, it may not necessarily be a bad thing.

New cars and motorcycles aged three years and below require no inspection.

For cars between three to 10 years old, they need to be inspected once every two years.

And if a car is older than 10 years, inspections need to be carried out annually.

Hence, as cars get older, VICOM will benefit from increased inspections even though the growth of the overall vehicle population stagnates.

5. Raising its car inspection fees

Due to inflation, VICOM has raised its car inspection fees several times in the last two decades.

From 2001 to 2004, it cost S$54 to have your car inspected but this was raised to S$56 in 2005 and then to S$58 in 2007.

The next revision would only come a decade later in November 2017 when inspection fees were raised by around 10.7% to S$64.20.

Unsurprisingly, the latest revision was made earlier this month in line with higher inflation.

Car inspection fees have increased by another 5% to S$67.41.

6. The private hire car and PMD boost

New forms of transport have kept VICOM’s inspection centres busy.

A new 2021 point-to-point regulatory framework has stipulated that all private hire cars (PHCs) will need to undergo a mandatory annual inspection.

Before this ruling, PHCs only had to undergo a periodic inspection from the third year after registration and every two years thereafter.

PHCs are typically vehicles used by ride hail companies such as Grab (NASDAQ: GRAB) and Gojek, and therefore exhibit higher than typical usage.

For the record, VICOM inspected 25,396 private hire vehicles in 2021.

Additionally, motorists who wish to convert their passenger vehicles to PHCs also need to pass a conversion inspection.

A total of 3,477 conversions were conducted last year.

Meanwhile, personal mobility devices (PMDs) such as e-scooters also need to undergo inspections from April 2020 to ensure that they comply with regulations for use on public paths.

PMDs now need to undergo an inspection once every two years.

These new requirements will help bring in additional revenue streams for the group.

7. Electric cars

As Singapore transitions towards cleaner energy, the government is also going big on electric vehicles (EVs).

The plan is to gradually phase out the cars with internal combustion engines (ICE) by 2040, as announced in Budget 2020.

For context, in 2021, the EV share of total new car registrations jumped to 4% from just 0.2% the year before.

For this year’s Budget, the government has committed to providing more EV charging points as part of Singapore’s Green Plan.

A total of 153 EV charging stations were rolled out recently in the northern and north-eastern parts of Singapore.

Investors may be concerned that the gradual phasing out of ICE vehicles may impact VICOM’s vehicle inspection business.

However, VICOM has confirmed that even though EVs are more reliable than ICE vehicles as they have fewer moving parts, EVs will still need to be inspected.

Components that are subject to wear and tear still require inspection, while EVs also require checks on their high-voltage electrical systems and battery packs.

Hence, periodic inspections for EVs are still a necessity.

8. Cars will always be in demand

Despite the Singapore government’s ambitions for the country to go “car-lite”, cars remain in high demand.

The latest Certificate of Entitlement (COE) premiums closed at S$90,589 for small cars and S$114,009 for the Open Category, typically used for larger cars.

Singapore had 581,488 cars as of September this year, up from 579,369 last year.

The reasons for this are twofold.

Many people still view owning a car as a status symbol because only the well-heeled are perceived to be able to afford one.

Also, kids that are driven around will grow up having the impression that a car is necessary to get from one point to another.

A mindset change is required, but it will not happen anytime soon even as the government continues to expand Singapore’s rail network with the opening of Phase Three of the Thomson-East Coast MRT line.

VICOM’s vehicle inspection division should therefore continue to enjoy consistent business for many more years.

Note: An earlier version of this article appeared in The Business Times.

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Disclaimer: Royston Yang owns shares of VICOM Limited.

The post Eight lessons from 11 years of owning VICOM appeared first on The Smart Investor.