It has been a roller-coaster ride for investors in 2022 amid the heightened volatility in the stock market.
The rising inflationary pressure and interest rate hikes by the US Federal Reserve, as well as by other central banks around the world, have all contributed to the volatile market.
While Singapore’s stock market was largely shielded from the market downtrend due to the huge exposure to the country’s banking stocks, it would nevertheless also be hurt by a potential recession in 2023.
Singapore’s Prime Minister, Lee Hsien Loong, warned that a recession could hit Singapore either next year or in 2024.
With so much uncertainty and near-term headwinds for investors to digest, investors can consider a defensive stock that can steady their portfolio; Sheng Siong Group Ltd (SGX: OV8).
Here are the three reasons why I think Singapore investors can buy Sheng Siong shares – in order to remain defensive – going into 2023.
1. Recession-resistant business model
Sheng Siong is one of the largest Singapore supermarket operators with 66 outlets across the island state.
With a potential recession in 2023, investors will find that Sheng Siong’s position as a “value-for-money” supermarket chain could see a pick-up in demand as consumer spending shifts towards essentials.
During its Q3 FY2022 earnings, Sheng Siong’s CEO, Lim Hock Chee, said that the company is uniquely positioned to capture consumer’s shift into savings mode because it is known for delivering value for money and good-quality, fresh products.
2. Resilient margin despite inflationary pressure
Another reason why investors should put Sheng Siong on their portfolio watchlist is because of the resilient margin that the company has maintained despite rising costs.
In Q3 FY2022, Sheng Siong’s gross margin continued to expand, rising to 29.4%, from 29.0% in the corresponding quarter a year ago.
The rise was attributed to an increase in sales mix of products with higher margins.
Sheng Siong also has over 1,500 products under its house brands that range from food to paper products.
This gives the company an advantage as house brands generally command better gross margins.
3. Growth opportunities with the ramp-up of supply of new HDB flats
There is also a growth opportunity for Sheng Siong.
So far in 2022, three new stores were opened while one store was closed, bringing the net new opening of stores to two.
In terms of the total retail area, it increased by 4.5% this year.
As Singapore’s government is expected to ramp up supply of new HDB flats (with plans to launch up to 23,000 flats per year in 2022 and 2023), this could allow Sheng Siong to bid for new store spaces to keep growing its store count.
Sheng Siong’s management targets to open three to five new stores per year, over the next three to five years.
The company’s management guided that they will be focusing on areas where Sheng Siong does not have a presence in.
Stay defensive with rising risk of a recession
Sheng Siong has a strong balance sheet to withstand the uncertainties over the next 12 months.
The supermarket chain also has a strong positive operating cash flow that allows them to be in a better position to navigate the rising rate environment.
At its current valuation, Sheng Siong is also quite attractive with a 12-month forward dividend yield of 3.9%.
Sheng Siong, however, is not immune to recession and a sharp decline in the economy could hurt growth in the near term while a worsening of supply chain issues could lead to higher operating costs and erode margins in the near term.
Having said that, the company is in a better position than most other stocks and buying into Sheng Siong shares will allow investors to steady their portfolio in 2023.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
