Why I buy VICOM Ltd?

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.

Why buy?
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.

What I expect?

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.

When will I sell?

If there is a steep drop in dividend, reducing the yield to less than 4%, I will probably switch out of the counter.

Buy and sell actions in August

Lots of action this month. Divested a few counters but bought quite a bit with the $$$ from divestment of Best World.

Out of Favour
Divested Kingsmen Creatives at the same price I bought. This is the turnaround story that is not working out yet. It reported a poor Q2 and I decided to wait for a clearer picture before re-entering again.

Divested half my stake in ISEC at 0.315. Tiny profit. Still an interesting outfit but its growth isn't exciting enough for it to occupy the middle of my portfolio. Hence decided to hold less and watch how the story unfolds.

Sold Capital Mall Trust at 2.10. It has risen more than 10% from my purchased price. Covered 2 years of dividend. Will recycle cash to other counters that offer higher dividend yield. Might re-enter when it offers a better yield.

Sold Mircro-mechanics at 1.41. Bought purely for its track record for dividend but its price has gone up to 7 years of dividend due to its good performance. Decided to divest it as its dividend yield dropped below 5%. Surprised me with a second rise of dividend this year and with a 8 cents dividend, yield gone up to 5.6%. On hind side, should have continued to hold on to it but actually felt pretty neutral about it. Probably am satisfied with the above expectation return from the counter.

Up the Dividend
Bought a lot more counters especially REIT to increase my annual dividend. Also, I like their outlook from next year onward.

Added Fraser Centrepoint Trust at 2.07. With the AEI of North Point completing this year, next year DPU should increase. Assuming a 12 cents DPU next year, it will translate to 5.8% yield and potential upside if DPU is even higher. Possible catalyst could be acquisition of Punggol Waterway Point.

Added Starhill Global Reit at 0.76. While Orchard office occupancy could still pose a problem, AEI at Plaze Arcade in Australia is expected to be completed in 20181Q. China property would have a more stable distribution with the completion of renovation by 20174Q. Expecting a minimal 4.8 cents DPU next year. This translates to a 6.3% yield.

Bought CDL Hospitality Trust at 1.575. I have bought and sold CDLHT a couple of times for the past 4 years. Win some, lose some and overall still negative. Betting on the improvement of its hotels in the next two years. Assuming a 10 cents DPU, dividend yield is approximately 6.3%.

Bought Mapletree Commercial Trust at 1.55. A retail and office reit which I have missed for the longest time. Its DPU has been increasing since its listing. Estimating a 9 cents DPU which will give a 5.8% yield.

Bought VICOM at 5.81 (cd) and 5.65 (xd). A subdue Q2 results but with immediate effect it is paying out at least 90% of its earning as dividend. It gives more certainty that the company can maintain its dividend for the next two to three years even when revenue dropped due to increasing de-registration of cars. From 2020/21 onwards, it should see an increase in its revenue and income again with more vehicles requiring checking.

Buying into the Sell-down
Quite a number of counters were sold down for the past month, for good or questionable reasons. The sell-down provided me an opportunity to buy some shares of the counter which I think could do well in the future.

Bought Dairy Farm at USD7.45. The company has announced a decent Q2 recently and turnaround seems to gathering speed with good progress in China. The price was beaten down by 2% to 3% in one of the trading day and I deem it as an opportunity to add some.

Bought InnoTek at 0.34. The stock is beaten down because it reported a poor Q2. However, 1H is still an improvement. While the remaining year might remain a challenge, effort has been put in by management to turn the company around. Initiated the position with the belief that the turnaround will come in 2018 or 2019.

Bought mm2 Asia at 0.475. The price has dropped sharply after its GV deal did not get through. Nevertheless, it reported a good 1Q results and I decided to take a punt on it.

Bought HKLand at USD 7.46. Read about its cheap P/B and good results. Hence, decided to take a stake when its price has dropped by about 5% from its recent high.

Bought UMS at 0.995. The price has dropped sharply after guidance of moderate performance in 2H. Nimble a bit as I believe it will maintain its dividend which is a tasty 6%.

Bought 800 Super at 1.12. The price has dropped after a poor Q3. The price weakened further just before it announced its full year results. Took the opportunity to re-enter the counter which I have divested at 1.26 in April. 

Bought Singapore O&G at 0.44. The price has dropped sharply after its weak Q2 results. Took a punt on it as company is still profitable and should get better results moving forward.

US Market 
Most of my purchase decision for the US markets come from the recommendation of MF subscription services. Unlike my local counters, I did not do as much homework on them. While I think that the valuations of the counters are high, I like their future stories hence my stake in them. All my purchases are small and will slowly wait for opportunity to accumulate more shares in the future. 

Bought Vail Resort at USD210.51. Luxury ski resorts operator. It has been growing through acquisition and opportunities to grow is still available. Its plan to keep its resort busy all-year round is working out well with Epic Discovery activities coming on more than one location.

Bought Cognex at USD105. Machine-Vision systems are used all around the world. Growth expected to continue. 

Bought Priceline at USD1870. Good Q2 results but market is spooked by its lower Q3 guidance. Taking this opportunity to have one bite on it.

Bought Intuitive Surgical at USD935. Intuitive Surgical have been growing for many years and its recurring income has increased. Decided to buy 2 shares to participate in its growth even though it has a high PE of 44x. 

Top 10 Counters Quarterly Reporting (July to September)

With the exception of Micro-Mechanics, the rest of my top 10 counters have reported their quarterly report. I will update this post with MMs results when it is out later this month which I believe would be a good.

With the divestment of Best World in July, my recent purchase of VICOM has taken the last place of my top ten counters. I will post on the purchase of VICOM soon.

The tables below summarize their performances for the latest quarter.

A+

Valuetronics

Fantastic quarter by Valuetronics as it continues its turnaround with strong momentum in wireless lighting business and continuous growth in automotive segment. NPM average 6.9% over the last four quarters, much higher than the average of 6.2% in the preceding 4 quarters. A good decision made by management to exit LED business and go into automotive segment. 

The company also produces a presentation for 20181Q report which provides a good read of the company's business. Barring unforeseen circumstances, I expect the business to continue to do well for this year. Hence, I will continue to hold on to my shares.

Straco
Straco has a good quarter as its revenue and net profit continues to grow. With the exception of UWX, the rest of its attractions - SOA, SF and Lixing cable car saw higher visitor numbers.Straco's NPM has always been above 30% and with little capex, it is generate lots of cash that allows it to pare down its debt.

I am hopeful for an increase in dividend either for this financial year, if not by next financial year.


Micro-Mechanics
Micro-Mechanics reported a good quarter with another increase in dividend. However, I decided to divest it just before it announces its results. Hence, I will not update its performance.

A
ParkwayLife REIT
ParkwayLife continues to improve its DPU y-o-y and q-o-q. With the distribution of its divestment gain over the four quarters, the return is even more impressive. Management has good track record in improving DPU and has make gains from its divestment. They are also forward looking and in the latest report has indicated the decision to diversify their portfolio by investing in properties used for medical manufacturing & storage facilities & education facilities (target 5% of portfolio). 

The price has run up quite a bit in the last few months and it is indeed tempting to lock in some profit. However since I still believe in its long term growth, I will hold on to my current holdings.

Frasers Centrepoint Trust
FCT reported a stable quarter with slight decline in its DPU. With its AEI for Northpoint 90% completed, DPU should improve next year. With a low gearing of only 30%, one possible catalyst would be acquisition of Punggol Waterway Point within the next few years. 

I will look for opportunity to accumulate more if the price softens.

B
Food Empire
Food Empire continues its turnaround story with an exceptional increase in both revenue and net profit y-o-y. However, q-o-q the results is not as impressive and the its NPM is not very stable. 

In Q1, Indochina's weaker performance was attributed to a change in festive season date. However, Q2 results does not see a big change. Hence, as management highlighted in the report, they are facing tough competition. The strongest segment is their Other Markets which improves both y-o-y and q-o-q. 

Based on past record, it seems that their 2H performance is better than 1H. If they are able to achieve the improvement in Q3, I will up them to the A Band.

Singtel
Strong growth in revenue but net profit suffers due to intense competition in India. NPM remains high at above 20%. Singtel should be able to maintain its dividend and hopeful for special dividend when it records its gain from its divestment of Netlink.

VICOM
Revenue and net profit continues to drop due to decrease in car inspection because of COE cycle. However, company has pretty much maintain its dividend and has up its dividend policy to 90% payout.Strong net profit margin of above 20% and if it is able to maintain similar dividend for just a few more years, its revenue and net profit will grow again.

Will look for opportunity to increase stake.

C
Raffles Medical Group
Slightly better than 20171Q, with revenue up by 1.0% and net profit up by 0.7% as compared to 20161Q. Q-o-Q, the improvement is better. 

The report highlighted weaken demand from foreign patients but it still generated more than enough sufficient cash to support its expansion. Raffles Hospital Extension will open in Q4, Raffles Chongqing in 2018 second half and Raffles Shanghai in 2019 second half.

The market responded badly with this Q2 results, causing the price to drop to below $1.2. I will take the opportunity to further accumulate my holding at the correct price. Expect to see the benefits from its expansion from 2020 onwards.

Starhill Global REIT
DPU continues to drop due to poor performance for its office segment and AEI for Plaza Arcade. As with Q1 report, I stay satisfied with the current DPU and actions taken by the management.  I expect a better performance in 2018, hence may buy more if the price is good.

Average down plan

Recently, Raffles Medical Group tumbled around 8% after it announced its 2017 Q2 results. As I still believe in its long term story, I did not sell the shares and was contemplating on averaging down. 

The questions are at what price? And buy how much?



Plan
After some thinking, I decided that for the growth stocks in my core holdings, I will adopt the following plan to accumulate more when there is a sell down. 

Firstly, will look at the business and financial and decide if there is any major change in its fundamentals. If there is deterioration in its fundamentals which increases in uncertainty and risk in holding on to the shares, I would have to decide if I need to cut loss. 

On the other hand, if fundamentals still hold strong, I will accumulate. I will average down when the price dropped by 20% from my average purchased price. Each time, I will add 20% of the original share count. Within the next 6 months (2 reporting quarters) of the first averaging down, I will continue to average down when price dropped by 20% of the last purchased price. After which the cycle will be reset.

Example
I have 10000 shares of ABC company at $1.000. If the price dropped to $0.80, I would add 2000 shares. With that, I would have 12000 shares at $0.97.

Within the next 6 month, I would only continue to average down if the price hit $0.64 ($0.80 x 0.8). If it does, then I would add 2400 shares at $0.64 ($0.80 x 0.8). With that, I would possess 14400 shares at $0.91. 

On the other hand, if the price has not dropped to $0.64 within the six months of the first average down, my next average down would be 2400 shares at $0.77. ($0.97 x 0.8). With that, I would possess 14400 at $0.93.

Conclusion
The plan provides a guide on how I will response when the price of my counter drop. I believe with this guide, it takes part of the emotion in my decision and hopefully it will turn out to be good. Having say that, I will not following the guide religiously. I am sure there will be occasions which require me to be more flexible.

I have not executed this plan yet on Raffles Medical Group as its price has rebounded last week. I do hope it will drop more in the coming weeks which will allow me to accumulate more shares in this outstanding business.