The Motley Fool

1 High-Yield Defensive Stock to Buy Today

Investors in Hong Kong have had little to cheer about this year. The ongoing political turmoil in the city, uncertainty around Brexit and the China-US trade war are just some of the many events that have weighed on investors’ minds.

In times of uncertainty, it may be useful to include a few defensive stocks in your portfolio. Ideally, these stocks should be (1) relatively immune to economic downturns, (2) have a manageable debt load and (3) a strong track record of consistent profits. 

In that regard, I believe Cafe de Coral Holdings Limited (SEHK: 341) fits that mold perfectly. The fast-casual dining group is one of Hong Kong’s largest restaurant groups and is the market leader in the fast-food segment.

Epitome of consistency

This year (2019) marked Cafe de Coral’s 50th anniversary. It has been a remarkable journey for the company, which as of 31 March 2019, has 355 stores in Hong Kong and 98 in Mainland China.

Over the years, the restaurant operator has been one of the most consistent and fastest-growing companies. The chart below shows the group’s earnings per share (EPS) and net profit trends since 2000.

Source: Cafe de Coral’s FY18/19 Earnings Report

As you can see, despite the occasional dip, there has been a clear upward trend in group’s EPS and profit over the last 19 years.

Robust balance sheet

Impressively, the company has achieved its growth with a clean balance sheet. As of 31 March 2019, it had zero external borrowings and had a net cash balance of HK$836 million (US$107 million).

The fast-food giant also boasts a strong cash-generative business. In the year ended 31 March, the group generated HK$658.7 million in free cash flow, allowing it to support its expansion plans and to continually dish out dividends to shareholders.

Growing in China

Despite its 50 years of success, it seems the company’s best years are still ahead. The management team has identified Mainland China as the next growth engine for the company and it plans to aggressively grow its branch network in the Greater Bay Area over the next two years to solidify its presence there.

Mainland China still accounts for just 13.6% of the company’s total revenue but represents the group’s fastest-growing segment. In the 12 months ended 31 March 2019, revenue from Mainland China grew 7%, while same-store sales increased by 2%.

Management has said that it plans to add 20 shops in China over the next 12 months, increasing its store count in China by 18.6%. It is not difficult to see Mainland China becoming an increasingly important part of Cafe de Coral’s profitability in the next decade and beyond.

Foolish bottom line

Recently, my fellow Foolish colleague, Tim Phillips, pointed out that Cafe De Coral could benefit from the boycott of Maxim Group’s fast-dining restaurants in Hong Kong as Maxim’s has been singled out as being “anti-protest”. This could lead to a near-term boost in sales.

In addition, Cafe de Coral’s stock has fallen some 20% from its peak amid the market-wide sell-off in Hong Kong. It currently sports an undemanding trailing price-to-earnings (PE) ratio of 21.2 and an attractive dividend yield of 3.8% (as of the time of writing).

Considering the long-term tailwinds at its back, the enormous market opportunity in China and management’s excellent execution record, I believe now may be a great time to add shares of this restaurant giant to your portfolio.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jeremy Chia doesn't own shares in any companies mentioned.