Business Times (20th Feb 2020)

VICOM’S proposal to split each of its ordinary shares into four could breathe new life into a relatively illiquid stock known for dishing out steady dividends.

Vicom’s theoretical post-split share price of S$1.953, calculated based on the volume weighted average price of S$7.813 per share for trades done on Feb 12, would make the stock much more affordable for investors. Since the announcement of the proposed split on Feb 12, shares in the vehicle inspection outfit have been on a tear, gaining 8.7 per cent.

On Wednesday, Vicom dipped S$0.10 or 1.2 per cent to S$8.50, from an all-time high closing price of S$8.60 the day before.

Though still thinly-traded, average volumes on the counter jumped more than four times in the past week, suggesting investors are already acting in anticipation of the decision.

Liu Jinshu, Tayrona Financial head of research, said: “The anecdotal account is that stock splits and bonus issues lead to the company’s market capitalisation increasing as the share price adjusts less than proportionately to the increase in the number of shares.” Vicom, a 67 per cent owned subsidiary of ComfortDelGro Corp, is the largest player in Singapore’s vehicle inspection market, one that has high barriers to entry and strong margins. Its earnings are typically stable, and are determined by Singapore’s vehicular population.

KGI Securities’ head of Singapore research Joel Ng said: “This makes Vicom one of the local market’s most defensive companies.”

While Vicom’s share price has been on the rise in recent years, Mr Ng said they have been supported by growing dividends.

Based on Wednesday’s closing price, its dividend yield stands at 5.4 per cent. “Vicom has been paying dividends of at least 90 per cent of their earnings in recent years and this payout seems sustainable due to its healthy cash flows and net cash position,” said private investor Goh Han Peng, who holds Vicom shares.

The company has also used its cash holdings to sustain its dividend payouts to investors.

For FY2019, the dividend of 38.4 Singapore cents represented a payout ratio of 119.4 per cent.

At the same time, Vicom’s attractiveness as an investment has limited the stock’s liquidity.

Mr Ng said: “Most of the Vicom shareholders I know are long-term shareholders who hold it for its steady dividends. If the shareholder mix is little changed post split, there will still be a lack of market participants who will trade the stock.”

Terence Wong, chief executive at fund-management firm Azure Capital, shares this view. “It boils down to whether existing shareholders wish to cash out and redeploy their funds elsewhere due to greater demand for Vicom after the split,” he said.

Vicom is also not cheap. It was trading at 26.5 times its historical earnings on Wednesday, some way off its 10-year historical average of 15.7 times.

Mr Wong added: “The one-to-four split will not have any effect on the valuations of Vicom.”

Mr Goh, however, believes the shares will continue to be well supported. “The valuation of the stock is now at a premium to the market on a price-earnings basis, but the share price could remain well supported due to a decent dividend yield in excess of 4 per cent, improved liquidity from the potential share split and higher profits from the vehicle inspection segment as more old cars are retained rather than scrapped,” he said.