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VICOM Limited (SGX: V01) is a vehicle inspection company based in Singapore. Apart from our famous ERP, anyone who owns a car in Singapore would probably know about VICOM.
Yes, I know… all car owners have gone through the dreaded hassle of bringing your car to VICOM knowing that a failed inspection means having to go through the trouble all over again (not to mention forking out inspection fees a second time around). However, if you come from an investor’s point of view, failed inspections and extra revenue may not seem like such a bad idea after all!
Unlike tech companies like Apple, Facebook, and Amazon, vehicle inspection is pretty much a boring business. You know, all the grease, oil, and mechanical work that gets your hands dirty. Then again, behind this boring business, VICOM Limited has been bringing in cash like clockwork just like what it’s supposed to be — a ‘well-oiled’ money machine.
Now before you get all hyped up and start investing in VICOM, there are some really important things that you must know as an investor… because the truth is… all successful investment starts with Knowing What You Own:
VICOM Limited sits in a very special position in the local transport industry. For a start, VICOM is a subsidiary of ComfortDelGro. Lim Jit Poh, chairman of ComfortDelGro, is also on the board of VICOM Ltd, SBS Transit and several other companies like Ascott Residence Trust Management Limited. As chairman of Singapore’s largest taxi and public bus provider, Mr Lim can bring incredible insight of the transport industry to VICOM.
Secondly, VICOM wholly-owns five of the nine vehicle inspection centers in Singapore and holds a majority stake (78%) in two other centers managed by JIC Inspection Centers. So technically speaking, VICOM has more than 75% market share of the vehicle inspection business in Singapore.
To further appreciate how well-positioned VICOM is, let’s have a look at the industry surrounding the nature of its business.
In Singapore all vehicles driven on the road are required by law to undergo a “road-worthiness” process to ensure that they do not become a road hazard for other road users. Vehicles older than three years are required to undergo inspections at one of the vehicle inspection centers in Singapore. This is done annually or biannually depending on the type of vehicle.
This also means that vehicle inspection in Singapore is a business where demand is “forced” by regulation. Owners must send their vehicles for regular inspections and there are no two ways about it. This landscape creates steady, recurring business for VICOM — which is GREAT for investors.
A point to note is that there is no pricing advantage in the industry. The industry is regulated by the government and inspection fees for all nine centers (VICOM, JIC or STA) are the same across the board. Prices still rise over the years but not by much:
That’s a $8.06 increment over the last 15 years – a CAGR of 0.93%.
Depending on which group you belong to, the slow increase in fees is good for consumers but bad for investors. At the same time however, this gives VICOM an advantage over its competitors. Since the inspection fees are the same everywhere, the locations of the vehicle inspection centers will play a huge role at drawing the number of vehicles inspected.
Here’s a map of where the VICOM, JIC and STA inspection centers are positioned in Singapore.
As you can see, VICOM has multiple locations in the northern, central, and eastern parts of Singapore. JIC, a VICOM subsidiary, covers the west.
Finally, because this business is regulated, it provides a high barrier of entry for new competition to enter the market, which again, provides a cushion of comfort for VICOM, JIC, and STA. Simply put, the margins will not be easily eroded by new entrants for at least the next few years.
So now you have a good idea of what the local vehicle inspection industry is like, let’s have a look at VICOM’s business segments and how they’ve been performing over the years.
According to VICOM, the company derives its revenue from three segments: Inspection & testing, rental, and others. Since rental and others only comprise less than 4% of total revenue, we’ll just focus on what really matters — the inspection & testing segment.
The inspection & testing segment is categorized into two parts.
As you already know, vehicle inspection is a must for all vehicles in Singapore. So how many vehicles head to VICOM for their mandatory checks? I took the liberty to consolidate the numbers over the past eight years for your reference:
In addition to its vehicle inspection services, VICOM also provides motor insurance, road tax renewal, in-vehicle unit (IU) maintenance, vehicle evaluation, accident vehicle assessment and vehicle emission certification and vehicle repair services at approved workshops.
While a growing new vehicle population in Singapore should rightly benefit VICOM, you must note that inspections are only mandatory over vehicles over three years old. If Singaporeans keep buying new cars before the third year is up, they will never get to visit VICOM’s inspection centers.
So the question is… do we?
Hardly. As the table shows, the number of new cars registered annually has fallen since 2007 while the overall number of vehicles has steadily increased. This is because Singaporeans have chosen to hold onto their cars because of rising COE and car prices.
Singapore is also a small country and a form of control is needed to maintain a healthy traffic network. As such, LTA has a Vehicle Quota System (VQS) to control the number of vehicles in Singapore:
It is an issue of demand and supply. Because the LTA controls the number of new vehicles allowed per year, the limited supply means COE and car prices are unlikely to drop much.
However, if the price of owning a car becomes too high and the number of new cars drop, in time there will be fewer new cars to replace the older cars being de-registered and this will lower the number of inspections.
Many investors often overlook this part of the VICOM’s business and focus only on its vehicle inspection segment. Truth is, SETSCO actually brings in a huge bulk of VICOM’s revenue every year.
SETSCO offers testing, training, inspection, consultancy, and product certification to a list of diverse fields in civil engineering, environment, building construction, electrical, industrial equipment & machinery.
A really simple way to understand this is: Before any structure/machinery/material can be used or consumed, they must be inspected and tested to ensure that it doesn’t compromise on safety.
For example, SETSCO was tasked to inspect the in-situ concrete strength of 8,000 reinforced concrete columns of selected Housing Development Board (HDB) blocks back in 2011 to determine the structural integrity of the buildings.
Other examples include:
If you think that’s a lot, you’ll be surprised to know that these are just a few examples of the many things that SETSCO does. In fact, SETSCO has been continually expanding its accreditation services into different fields, giving the company access to more industries in the testing, inspection and certification (TIC) market.
While the TIC market is fragmented and hard for a single company to fully dominate, many of the services are actually interlinked. For example, SETSCO’s accredited laboratory and field testing inspects multiple materials used for civil engineering — cement, concrete, rock, soil, structure fixing. It is a lot more sensible to task one company who is accredited to handle all five tests than for five different companies to undertake one each.
In other words, the more SETSCO expands their scope, the better for their business. You can get the list of SETSCO’s accreditations here.
As the market leader in the vehicle inspection business in Singapore, VICOM enjoys a stable, recurring stream of cash flow from the constant number of mandatory vehicle inspections performed every year. Beyond that, SETSCO gives its parent company an element of growth as it continually expands its presence in the TIC market.
VICOM is a solid, “boring” business that keeps going on and on and on — which is exactly the way I like it.