Singapore Retail: Preparing for the turn of the retail tide
- Higher inflation and impending recession to shroud retail spending outlook in coming quarters
- Analysis of past 4 recessions shows that general retail index generally retreats c.13% – 19% from peak to trough with a 2-quarter lag compared to GDP
- Sectors that saw the dip and demonstrated tenant stickiness proved to be food courts & cafes, fast food outlets, convenience stores
- Picks to prepare for a turn of tide: SSG for supermarket exposure, FCT and LREIT as a proxy to suburban retail and necessity spending with 100% / 47% exposure
Looking at economic downturns for clues of how “consumer stretch their dollar”. While retail sales data in 2022 continue to rebound strongly on the back of reopening optimism, we see momentum slowing, with sticky inflation and slower economic growth prospects weighing on consumer confidence in 2023. Our analysis of the performance during the past four recessions (over 1997 – 2022) generally saw a 13% – 19% peak to trough dip in the general retail index with sectors focused on necessity spending showing relative resilience. Our recent consumer survey indicated that consumers will “stretch their dollar” and focus on essential goods, highlighting our confidence that essential goods will outperform in the face of economic adversity. We notice retail sub-categories such as “food courts & cafes, fast food and minimart & convenience stores” showed the smallest volatility and lags the decline in retail sales by c.2 quarters through past downturns. On this front, we believe that suburban focused retail landlords FCT and LREIT, and retailer Sheng Siong, will be relative outperformers come 2023.
Sheng Siong Group remains our top consumer pick to ride out the tides of recession. We like Sheng Siong Group (SSG) as the third-largest supermarket operator in Singapore in times of recession. We believe should household income come under stress, affordability will become key. SSG’s value grocery offerings would likely see increased demand, driving top-line growth. We maintain BUY, with our target price at S$1.76 with a yield of almost 4%.
Suburban retail landlords as proxy for necessity spending. We believe the suburban retail landscape will continue to deliver resilience in the face of economic uncertainty as consumer purchasing substitution will shift spending toward essential items, which are key exposures for landlords like FCT and LREIT with their purer exposure in the suburban landscape. Both stocks yield an attractive forward FY23 yield of 6.4% and 7.3%, respectively, and are offering yields close to multi-year highs.