Investing in Lincotrade: A Strategic Opportunity Amidst Falling Interest Rates

After the Fed cut rates by 50 basis points last Wednesday, I began exploring industries that might benefit from the potential ongoing interest rate reductions. Specifically, I turned my attention to the construction industry, which investors have largely avoided. With my experience in finance, I understand that this sector in Singapore is currently struggling, and further interest rate cuts could provide much-needed relief.

To elaborate, continuously lowering interest rates will boost demand for residential and commercial developments. This increased demand will result in more construction projects and extensions. Consequently, the construction industry will experience growth.

Additionally, lower and continuously decreasing interest rates will encourage more economic activity, as money circulates more frequently within the economy. This creates a robust economic environment, leading to higher demand for assets such as property, which in turn revitalizes the construction industry.

Instead of looking for a main contractor, I aimed to find a subcontractor specializing in interior work, one that is flexible regarding project size. The idea is that large projects would provide a stable revenue base, while smaller projects would contribute additional growth. Additionally, I expect this company to diversify beyond the residential market.

With these criteria in mind, I discovered Lincotrade & Associates Holdings Limited (SGX: BFT) aka Lincotrade. This company, which went public through a reverse takeover, specializes in interior fitting-out services, additions and alterations (A&A) works, and other building construction services. They primarily serve three segments: commercial premises (offices, hotels, shopping malls, and F&B establishments), residential premises (condominium developments), and showflats and sales galleries.

Source: The Edge

The Competitive Advantage

Lincotrade have their own in-house processing facility to process, assemble and manufacture carpentry products to support and complement our interior fitting-out services. The company will further benefit once it relocate to their newly tender Tuas JTC Factory with a tenure of 20 years from Mar 2024, with a bid price of approximately S$9.6 million that is larger than their current premises. The larger space will allow them to expand their manufacturing line and likely allow them to take on more businesses.

Lincotrade's integrated business model within the interior fitting-out industry allows them to pursue both shorter-term projects (such as showflat developments) as well as longer-term engagements (commercial and residential spaces). Their success in the commercial segment underscores the robustness of its end-to-end service solution and project management expertise. Projects in this segment are typically larger in contract value, yield higher margins, and can bolster our order book. As of 30 June 2024, Lincotrade’s order book stood at approximately S$39.5 million, which is expected to be fulfilled over the next two years. With an improved business environment, I believe they will be able to grow it further.

Highlights Lincotrade Success in Commercial Projects. Source: FY2024 Report

Lincotrade is also actively involved in various environmental, social, and governance (ESG) initiatives. In their projects, the company utilizes environmentally-friendly materials such as laminate and veneer made from reconstructed or recycled content to minimize the harvesting of natural forests. This commitment aligns them with developers and clients who are also actively engaging in ESG initiatives.

While this may sound cheesy, I believe the strength and experience of Lincotrade’s management team have been crucial to the company’s stable performance, even amid challenging market conditions. Notably, they successfully navigated the reverse takeover process within the past two years while maintaining profitability (Excluding RTO cost) during the downturn affecting the broader interior fittings industry. Excluding one-time RTO expenses, Lincotrade would have remained profitable for both fiscal years, despite rising interest rates squeezing margins for many of its peers. This demonstrates capable leadership that can effectively steer the business through changing economic cycles.

Near Term Catalyst

As part of Lincotrade’s ongoing efforts to diversify and capture greater overseas opportunities, they have established new subsidiaries in both Malaysia and China. This expanded geographical footprint aims to strengthen their business model while tapping into new markets. The company recently announced securing its first subcontracting project in Malaysia (not in order book yet) —a commercial project where they will install a fire-rated drywall system and gypsum board wall cladding for an infrastructure development in Johor. The initial contract value is approximately RM 2.3 million, with potential to increase to around RM 12 million, and is targeted for completion by the first quarter of 2025. Additionally, they participated in INDEX Saudi Arabia 2023, a prominent event for the interior design, furniture, and fitting-out industry in Saudi Arabia. Through this engagement, the company aims to explore potential partnerships and leads within the fast-growing Middle Eastern commercial real estate sector.

Falling interest rates would create a more favorable environment not only for Lincotrade’s customer base and overall industry demand but also for the company’s financing costs. The company has bill payables likely tied to floating rates, so decreases in borrowing costs would positively impact financial performance. Lower rates may also provide an opportunity to refinance some existing debt obligations at more attractive terms in the future. With a strong balance sheet and healthy order backlog, Lincotrade is well-positioned to capitalize on savings from lower financing expenses, boosting margins and generating additional value for shareholders as monetary policy normalizes.

My Opinion – The Key Challenge

Any business expansion strategy carries an element of risk. For Lincotrade, the key challenge will be balancing growth ambitions with financial prudence. In the past, many interior fitting firms overreached by pursuing rapid expansion without sufficient focus on maintaining profitability, eventually leading to their decline. As the management team drives the company forward, careful consideration must be given to ensuring new projects and ventures are strategically and economically viable. Rather than purely chasing short-term revenue gains, priorities should include disciplined evaluation of costs, margins, and funding requirements at each step of development. As long as Lincotrade proceeds in a controlled manner with longevity in mind, it is well-positioned to navigate potential pitfalls and capitalize on opportunities sustainably.

Conclusion

In short, given the potential for continuous Fed rate reductions, Lincotrade presents a compelling investment opportunity. Its robust business model, strategic growth approach, and proactive ESG initiatives stand out. The management team’s proven track record and recent expansions into Malaysia and China highlight their capability and ambition. Additionally, the favorable interest rate environment is set to reduce financing costs, enhancing margins and shareholder value. With a healthy order book and a disciplined project evaluation, Lincotrade is well-positioned for sustainable growth and long-term value creation.

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