There’s a school of thought that once stimulus measures are wound down and JobKeeper is finished, we’ll witness another share market sell-down in response to any revelations that the economy has gone to ‘hell in a hand basket’.
Of course, this may never eventuate. All the early signals suggest that the recovery we’re on looks much better than anyone expected. However, it’s never a bad idea to add some good defensive shares to your portfolio. These shares are more likely to hold up when others are falling. Given that investors are currently looking at the market through rose coloured glasses, bringing some contrarian thinking to the basket of shares you hold could have a lot merit.
When looking for defensive shares, it’s important to look for companies that have low debt on balance sheet, sustainable and high quality underlying core earnings, quality management, and sufficient cash to seize growth opportunities. It’s also preferable that they aren’t in a sector at the apex of rapid technology and/or regulatory upheaval.
While these shares are often slow-burners in terms of strong growth, they typically have the capacity to retain their core earnings when the markets are in flux – like now.
Here are 3 ASX shares to consider.
Hansen Technologies Limited (ASX: HSN)
While this technology mid-cap doesn’t have the strong organic growth of local peers, like TechnologyOne Ltd (ASX: TNE), Whispir Ltd (ASX: WSP), and Appen Ltd (ASX: APX), the quality of its underlying earnings can’t be understated.
Two thirds of the company’s revenue is from recurring software fees. While not dynamic, this revenue is at the very least relatively bankable, regardless of what the economy is doing. The stock also earns kudos for doing what few companies are prepared to do right now – provide earnings guidance. Given the state of the economy, its full year guidance of operating of revenue between $298 million and $300 million – slightly lower than the original $300 million to $305 million – is encouraging.
What I also like about the company is its management’s track-record in growth by acquisition. With a net debt to equity ratio of around 59%, the business looks well positioned to afford future acquisitions. At $3.08, Hansen shares are trading at a 23% discount to Bloomberg’s 12-month price target of $4.02.
Spark Infrastructure Group (ASX: SKI)
As a leading electric utilities business with $18 billion of total electricity network assets, Spark’s core earnings have a high degree of resilience about them. Much of that resilience was reflected in the company’s Macquarie Investor Conference Presentation in early May. Spark reconfirmed its FY2020 distribution guidance of at least 13.5 cents per share.
Despite cost increases linked with summer bushfires and tree management, the latest financial result saw earnings before interest, tax, depreciation and amortisation up at each of its largest business units – CitiPower and Powercor in Victoria and SA Power Networks in South Australia. The result was buoyed by rising regulated tariffs and higher services revenue. Then there are the returns at electricity transmission network TransGrid, of which Spark owns 15%.
Government tariff adjustments on electricity prices tend to move in tandem with economic activity – and hence key indicators like the 10-year bond yield. A return to more normal bond yields beyond fiscal 2021, which hit record lows mid-2019, should improve Spark’s returns and distributions over the longer haul.
While the Spark share price has bounced from a low of $1.72 mid-March to $2.15, it still trades at 6% discount to Goldman Sachs’ target price of $2.30.
ASX Ltd (ASX: ASX)
ASX’s standout defensive features come from its near-monopoly status as operator of Australia’s primary market for the listing and trading of securities. Equally compelling is the quality of its balance sheet, and notably its debt-free position, and strong cash balance.
To its credit, the company was quick to warn the market of a significant decline in cost growth for FY20 (below guidance of 6–8%) due to COVID-19. While projections within the current market are problematic, the company expects net interest earned on collateral balances – which accounts for around 90% of total net interest income – to remain elevated in the near term.
Given the company’s dominant market position, history of cost containment, and ability to deliver consistently good EBIT margin, it looks better positioned than the market at large to weather near-term market volatility. This bodes well for a sustainable dividend payout ratio of around 90%.
In my opinion it’s worth watching the ASX Ltd share price for dips following future market corrections, with sub-$70 making for a more comfortable buying position than its current price of $88.57.