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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Stay Tuned.
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