Impending recession ahead! Layoffs are occurring more frequently! Higher interest rates fuels further recession fears!
These are some of the frightening phrases that have been surfacing as headlines in the news as there are increasing concerns that many parts of the global economy such as the US may enter a recession either in 2022 or 2023.
If US, the largest economy goes into recession, almost all countries across the world will be affected. While Singapore may not enter a recession as it continues to forecast growth in 2022, the country’s leaders have warned not to rule out the risk of recession.
With this, we identify 5 companies listed on the Singapore Exchange which we think are recession proof and provide reasons why we think so. Recession proof does not mean it is immune to any recession, it means that the company can withstand the shocks and come out relatively unscathed. Examples of reasons include being in a resilient or essential industry, having a monopoly and stocks that may even benefit from a recession as consumers switch to lower costs of living
| Company | Ticker (SGX) | Market Cap (S$’b) | P/E ratio (times) | Dividend Yield (%) | Dividend payout ratio (%) |
| ST Engineering | S63 | 12.5 | 22.0 | 3.5 | 82 |
| Sheng Siong | OV8 | 2.33 | 17.1 | 4.0 | 35 |
| Kimly | 1D0 | 0.47 | 12.8 | 3.7 | 63 |
| VICOM | WJP | 0.72 | 29.0 | 3.1 | 118 |
| Singapore Exchange | S68 | 10.1 | 24.5 | 3.4 | 77 |
1. ST Engineering (SGX:S63)
ST Engineering (STEngg) was originally a defence and military manufacturer and is now also an engineering company with three main segments, namely Commercial Aerospace, Urban Solutions & Satcom and Defence & Public Security after the company was reorganised from its original four sector structure, namely Aerospace, Electronics, Land Systems and Marine.
The three segments are further combined into two clusters with the Commercial Aerospace and Urban Solutions & Satcom forming one cluster.
The commercial cluster will drive STEngg’s international growth and the Commercial Aerospace segment includes business operations such as Aircraft MRO (maintenance, repair and overhaul, aircraft equipment manufacturing and aviation asset management. The Urban Solution & Satcom segment of the cluster includes smart mobility, utilities and infrastructure, urban environment solutions and satellite communications.
The Defence & Public Security cluster includes defence business areas such as digital, land, marine and air defence while public security includes infrastructure solutions.
STEngg was on a stable growth trajectory up to 2019 and COVID-19 meant that revenue and profits dipped by about 10% in 2020. It regained its momentum in 2021 with revenue and profit levels just slightly lower than 2019 levels, showing the company’s resilience to quickly get back on track despite COVID-19 impacting operations for most parts of 2021.
Although STEngg started as a local company, it is now geographically diversified with US and Europe contributing 36% of total revenue. It is also well diversified across segments, with the Defence & Public security sector contributing 53% of revenue, Commercial Aerospace contributing 32% and Urban Solutions & Satacom contributing the remaining 15%.
STEngg was also able to increase its order book from $15.4 billion in 2020 to $19.3 billion in 2021 with not only new strategic partnerships but also with existing partners. It expects outlook to remain stable with positive growth. The commercial aerospace segment is expected to see steady recovery trajectory as it is likely that the aviation sector has bottomed in 2021 while the recovery trajectory depends on the reopening of borders and how fast flying activities resume.
The Urban Solutions & Satcom segment will benefit from increased focus across smart cities, smart mobility, smart infrastructure and satellite communications. The defence segment benefiting from volatile global security climate and geopolitical landscape.
On an overall basis, STEngg is resilient as it is in industries such as defence where spend are not as influenced by economic budgets and more by defence requirements and in critical growth segments such as Urban Solutions. With a significant order book growth, it is also clear that STEngg will be buffeted against any economic recession.
2. Sheng Siong (SGX:OV8)
Sheng Siong is one of Singapore’s top retailers, with more than 64 supermarkets island wide. The supermarkets are primarily located in the heartlands of Singapore and provides customers with a range of live produce, general merchandise and a selection of house brands, so as to provide customers with cheaper alternatives.
To support Singapore’s retail operations, Sheng Siong built a customised central distribution centre in Mandai Link which currently supplies more than 70% of the goods to the supermarkets and also has food processing capabilities, warehousing and cold store facilities.
Sheng Siong also ventured into Kunming, China in 2017 and currently operates four supermarkets there.
As see in its financials below, Sheng Siong saw record high 2020 revenue and earnings per share due to the COVID-19 pandemic with elevated demand as movement restrictions and limited dining out meant that there was more dining at home.
While this began to normalise in 2021 as the COVID-19 pandemic situation stablised, parts of the year still faced movement restrictions which meant that demand remained elevated. Sheng Siong expects demand in 2022 to further normalise with the easing restrictions and increased travel.
Sheng Siong also faces further risks from supply chain disruption and higher inflation as they might not be able to fully pass through such costs to its customers as its customer base tend to be price sensitive and may consider other slightly more premium supermarkets.
Sheng Siong operates in a consumer staple industry and with record high revenues made in a pandemic driven recession, thus Sheng Siong has proven itself to be resilient. While there are downside risks such as inflation, should a recession affect the average consumer, Sheng Siong may see a switch to dining in, similar to what occurred during the COVID-19 pandemic, as customers seek to reduce the cost of living.
3. Kimly (SGX:1D0)
Kimly is one of the largest traditional coffee shop operators in Singapore. Kimly also manages an extensive network of food courts and industrial canteens. It operates a few brands in the coffee shops and food courts such as Kimly Mixed Rice, Kimly Dim Sum, Kimly Seafood “Zi Char”. Kimly owns the Tenderfresh Group, which is a variety of brands using chicken, Tonkichi, a Japanese restaurant and Rive Gauche, a patisserie.
In total it has 85 food outlets of which 55 are open for the entire day and it has 139 food stalls, 2 Tonikichi Restaurants and 7 Rive Gauche Confectionery shops.
In May 2021, Kimly acquired a 75% stake in home-grown food business Tenderfresh for $54 million, giving it an opportunity to expand into the growing halal food industry in Singapore and neighbouring countries. The company has an option to acquire the remaining 25% stake in Tenderfresh in five years.
As seen in the financial highlights below, Kimly’s revenue and profits remain robust in FY20 (For the period ending September 2020) and saw significant growth in FY21. FY20’s robust performance could be attributed to consumers switching from spending in restaurants to spending in coffee shops which is a sign that when the economic outlook is uncertain, consumers tend to reduce their spendings. In spite of pandemic induced challenges, FY21 saw further growth on higher number of outlets.
In what is quite possibly one of the best ways to demonstrate the resiliency of its business, a coffeeshop in Yishun was sold for $40 million in June 2022, at a psf price of $9.3k, much higher than the $6.9k psf price for ground floor level retail units in certain shopping malls in Orchard Road such as Far East Plaza and Lucky Plaza.
Similarly to Sheng Siong, Kimly operates in a consumer staple industry and with record high revenues made in a pandemic driven recession, thus Kimly has proven itself to be resilient. While there are downside risks from the various pandemic induced challenges, should a recession affect the average consumer, Kimly may see consumers switch to spending in coffee shops, similar to what occurred during the COVID-19 pandemic, as customers seek to reduce the cost of living.
4. VICOM (SGX:WJP)
VICOM, a subsidiary of ComfortDelGro (SGX:C52) and a sister company of SBS Transit (SGX:S61) is Singapore’s leading provider of vehicle inspection and technical testing services with seven centres island wide. The company provides a comprehensive range of inspection and testing services in fields including mechanical, biochemical, civil engineering and non-destructive testing and food testing.
In Singapore, vehicle owners are required to send their vehicles for regular vehicle inspections to ensure that they maintain their vehicles in roadworthy conditions to minimise potential hazards to all road users.
The frequency of inspection increases as the vehicles become older. For a private car, the first inspection is required when the car reaches three years. Subsequently, it is to be inspected once every two years until the 10th year. Cars above 10 years must be inspected once a year.
During the inspection, vehicles are assessed on the conditions and serviceability of key components, including the brakes, wheel alignment and lighting.
Any vehicle that does not pass the inspection will not be able to renew its road tax and, hence, will not be allowed for use on the roads.
As seen in the financials presented in the chart below, VICOM was not spared by the pandemic as the Land Transport Authority of Singapore granted a 6 month deferment for private vehicles due for inspection. However it was not severely hit as compared to other businesses as revenue only declined 17% in 2020 before recovering in 2021. Profits declined from $28.4 million in 2019 to $24.5 million in 2020 and $24.8 million in 2021 respectively, due to various government support schemes which buffeted the bottom line by $7.7 million and $1.8 million respectively, without which the declines would have been much more significant.
As regular vehicle maintenance is not only essential for the safety of the driver and the general public but also mandated by the law, VICOM is an essential service company and is somewhat resilient in times of recession.
5. Singapore Exchange (SGX:S68)
Singapore Exchange (SGX) is the only stock and derivatives exchange of Singapore. While one would expect trading volumes to decline during a recession as stock prices would see a decline, SGX’s multi asset strategy with served it well as revenues remained stable while net profit declined 6% in FY21 (ending 30 June).
To offset against weak equities growth in the past decade, SGX diversified into a multi-asset business across three core pillars – Equities; Fixed Income, Currencies & Commodities (FICC); and Data, Connectivity and Indices (DCI). As such, Equities now make up 66% of total revenue with FICC and DCI contributing 20% and 14% respectively.
The multi-asset strategy helps to smoothen out SGX’s revenues through the interest rate cycle as a low interest rate environment will impact treasury income, but it will also spur demand for its multi-asset offerings as investors seek enhanced returns and the opposite applies in a high interest rate environment.
As global investors continue to expand their investments in Asia, exchanges globally have been increasingly focused on enabling Asian access and risk management opportunities to participants. SGX is well positioned as one of the most reliable platforms for capital raising as it operates out of Singapore, a country with one of the most robust regulatory systems in the world, together with a unique value proposition as the leading exchange offering single-point access into key Asian markets.
SGX keeps itself competitive by investing significant levels of capital expenditure on technology as it is a key enabler as well as a potential source of disruption to SGX’s business model in the long run should it not be able to keep up successfully.
Closing statement
No company is completely immune to a recession, as each recession is different and impacts different. In addition, as shown in previous crises where most stocks would still plunge significantly.
These five stocks are all likely to show resilience in a recession, but for a different variety of reasons mentioned above such as either being in essential industries, having a de facto monopoly or provide products which consumers would switch to in a recession. These companies also have a track record of growth, indicating management’s strength in navigating these companies through the times.
