According to latest official readings, the Singapore economy is “flirting” dangerously with recession. In 2Q19, Singapore’s gross domestic product (GDP) grew a meagre 0.1 percent, widely missing economists’ expectations of a 1.1 percent growth. Exacerbated by the US-China trade war, the local manufacturing sector dragged the broader economy, contracting by a wider 3.8 percent in the quarter.
That said, over in the US, the Federal Reserve has been signalling a strengthening case for an interest rate cut at the end of this month. The undercurrent driving this is also none other than the ongoing trade war with China, which is beginning to materially impact on US economy as well.
Given the two information, what can retail investors do to protect themselves against adverse shocks? We offer three stock ideas to rotate into in the event when recession hits.
Netlink NBN Trust
(Source: Netlink NBN Trust)
As the largest fibre network operator in Singapore, Netlink NBN Trust (Netlink) is the sole appointed network company as Singapore’s Next Gen National Broadband Network. Due to the highly regulated nature of the business, high barriers of entry have allowed Netlink to enjoy a monopoly status.
In a brief, internet service providers (ISPs) such as M1, Starhub and Singtel, need to leverage on Netlink’s fibre network infrastructure in order to reach end-users. In return, end-users pay Netlink an installation fee when setting up a new fibre broadband terminal, while ISPs pay a recurring rental fee for tapping on their infrastructure.
Since demand for Netlink services will continue (because who can live without the internet?) regardless of the state of the economy, investors can have more assurance of the 5.5 percent distribution yield they are looking at based on the current unit price of $0.880. With a more dovish interest rate outlook going into 2H19, a sustainable 5.5 percent yield will look even more attractive.
Sheng Siong Group Holdings
It is known to Singaporeans that Sheng Siong Group Holdings (Sheng Siong) offers the best deals for fresh produce amongst all local supermarket operators. Though not necessarily for the non-fresh produce, we think this trait will allow Sheng Siong to perform better than its peers (FairPrice, Giant and Cold Storage) when consumers tighten their belts and reduce consumption on non-essentials like ice-cream and snacks.
Although consumer staple stocks are known to be defensive and have with little growth potential, the same cannot be said about Sheng Siong.
For one, the group has an excellent track record in its execution of setting up new stores, all just with its own internal funds. As of the latest 1Q19, Sheng Siong boasts a total store count of 54 local stores and one store in China. Bolstered by 10 new store openings since a year ago, revenue grew 10.1 percent to $251.4 million while net profit rose 5.9 percent to $19.4 million in the period in 1Q19.
Meanwhile, the China store only contributed 0.5 percent of revenue growth to the group due to its nascency. If replicating the model in China proves to be a success, we could see the Sheng Siong’s brand taking off in the world’s most populous country. At the current share price of $1.10, Sheng Siong has an indicative yield of 3.1 percent that is supported by its constantly positive operating cashflow and net cash (zero debt) of $86 million in its balance sheet.
Looking to the transport sector, ComfortDelgro Corporation (ComfortDelgro) is a defensive counter during a recession, simply due to the need to commute.
While the penetration of private-hire operators has significantly disrupted ComfortDelgro in the past few years, the merger of Grab and Uber Southeast Asia, has consolidated the local ride-hailing scene considerably, albeit the recent entry of GoJek and Vietnamese start-up FastGo.
Meanwhile, recently proposed regulation of private-hire operators along with their drivers and vehicles, could level the playing field and ease competition for ComfortDelgro. Inherently, this would also help to ease the contraction of ComfortDelgro’s taxi fleet.
Over in the public transport segment, ComfortDelgro – which owns SBS Transit – is also set to benefit from increased ridership. Without going into details, we had already previously assessed that SBS Transit’s operations and its contributions to ComfortDelgro would significantly improve after migrating to the “contracting model” whereby the government takes over the ownership of the operating assets. Further boding well for ComfortDelgro, the Public Transport Council has also stated that authorities will be reviewing the fare transport mechanism to better reflect the rising operating costs for Singapore’s rail network.
In the meantime, the group has embarked on a more aggressive investment strategy in Australia. In 2018 alone, ComfortDelgro invested over $450 million, acquiring Tullamarine Bus Lines, National Patient Transport, Coastal Liner, Forest Coach Lines and Buslink Group. Following which, in April this year, the group continued its spree when it acquired B&E Blanch – a bus operator running scheduled route and school bus services in northern New South Wales.
Notwithstanding that, the group has already seen its financial performance turning around, with revenue rising 7.6 percent to $947.3 million and net profit increasing 6.2 percent to $70.4 million in the latest 1Q19. Despite the growth potential, at the current share price of $2.81, the stock still offers a decent indicative yield of 3.7 percent. As contributions from new acquisitions flow in, the upcoming 2Q19 earnings season would be an interesting quarter to look out for.
Whilst experts and economists are still claiming that recession is not imminent, trade tensions between US and China could potentially escalate again to further weigh on our trade dependent economy. In face of the risk, it would only be rational for investors to enhance robustness of their portfolio.
The above-mentioned companies have little to no exposure to the global climate and not subjected to cyclicality. As operations are also localised, the trade war has minimal impact on the demand for their goods and services as well. Such are the typical characteristics of defensive counters that investors should bear in mind about when searching for safe havens.