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.

 

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&rsquo 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&rsquo s management team have been crucial to the company&rsquo 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&rsquo 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) &mdash 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&rsquo s customer base and overall industry demand but also for the company&rsquo 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 &ndash 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&rsquo 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.

 

&bull The commercial project is an infrastructure development in Johor, Malaysia, which the Group will provide Sub-Contract Works with an initial contract value of approximately RM 2.3 million that is targeted to be completed by the first quarter of 2025, and can potentially be increased to approximately RM 12 million

 

&bull This is the Group&rsquo s maiden commercial project in Malaysia since setting up its Malaysia subsidiary in August 2023

 

&bull Aligned with the Group&rsquo s strategy to enhance its business model and harness new business opportunities beyond Singapore

 

Lincotrade & Associates Holdings Limited, (&ldquo Lincotrade&rdquo or the &ldquo Company&rdquo or &ldquo 立 鎧 企 業 &rdquo and together with its subsidiaries, the &ldquo Group&rdquo ), a specialist in interior fitting-out services, is pleased to announce that the Group&rsquo s subsidiary in Malaysia, Lincotrade & Associates (Malaysia) Sdn Bhd, has secured its maiden commercial project, whereby the Group will supply, deliver and install fire-rated drywall system and gypsum board wall clad (&ldquo Sub-Contract Works&rdquo ) for an infrastructure development in Johor, Malaysia.

 

The Sub-Contract Works has an initial contract value of approximately RM 2.3 million that is targeted to be completed by the first quarter of 2025, and can potentially be increased to approximately RM 12 million.

 

Commenting on this maiden commercial project secured in Malaysia, Managing Director of Lincotrade, Mr. Tan Jit Meng (陈 日 明 先 生 ) said: &ldquo We are excited on this opportunity to build our track record in Malaysia and this is a strategic milestone in our overseas ambitions.

 

With Lincotrade&rsquo s strong capabilities in interior fitting-out services, we believe our team has the experience and expertise to complete the Sub-Contract Works of this infrastructure project on a timely basis. 

 

Building on this momentum, we look forward to secure more overseas projects that complement the diversification of our business portfolio.&rdquo

 

None of the Directors or controlling shareholders of the Company has any interest, direct or indirect, in the contracts secured, other than through their respective shareholdings (if any) in the Company.

 

 

 

 

Commenting on its FY2024 results, Managing Director of Lincotrade, Mr. Tan Jit Meng (陈 日 明 先 生 ) said: &ldquo Operationally and financially, FY2024 has been a year of consistency that reflects our core competencies in project management and execution.

 

With a prudent financial approach, we aim to drive momentum in growth levers within our business model comprising three different business categories.

 

In addition, we are enhancing our business foundation with the acquisition of the Tuas Factory that will cater to our business strategies and future plans. 

 

While our business portfolio is deeply rooted in Singapore, we recognise the wider opportunities for Lincotade in overseas markets that complement our competitive strengths.

 

Taken together, we believe it positions us well to deliver greater value for our customers and drive long-term shareholder value.&rdquo

 

Mr. Tan added, &ldquo With the announcement of our dividend policy earlier this year, we are pleased to announce a final dividend of 0.32 Singapore cents per share that brings total dividend to 0.70 Singapore cents per share for FY2024. 

 

Translating to a dividend payout of approximately 52.6% of the net profit attributable to shareholders in FY2024, which is higher than our dividend policy guideline, we believe this demonstrates our commitment to reward shareholders.&rdquo

 

The Group posted revenue of S$67.9 million in FY2024 with revenue growth from its commercial and residential business segments: Lincotrade is engaged in the provision of interior fitting-out services, additions and alterations (&ldquo A& A&rdquo ) works and other building construction services primarily for three business segments, commercial, residential and showflats. 

 

The Group&rsquo s commercial business segment continue to be the key revenue contributor and in FY2024, revenue from this business segment increased 16.3% or approximately S$7.9 million, to approximately S$56.3 million from S$48.4 million in FY2023, mainly due to revenue contribution from some of the Group&rsquo s larger commercial projects.

 

In FY2024, revenue contribution from the Group&rsquo s residential business segment increased 27.5% or approximately S$936,000, to approximately S$4.3 million from S$3.4 million in FY2023, mainly due to a higher percentage of completion from the Group&rsquo s residential projects.

 

However, revenue contribution from the Group&rsquo s showflats business segment declined 60.1% or approximately S$10.8 million, to approximately S$7.2 million in FY2024 from S$18.0 million in FY2023, as the larger showflat projects were substantially completed in FY2023.

 

Gross profit increased marginally to approximately S$7.9 million in FY2024 despite lower revenue: The Group&rsquo s gross profit margin increased to 11.6% in FY2024 (FY2023: 10.4%), mainly due to higher proportion of revenue generated from commercial segment, which generally yield higher margins for the Group.

 

Profit before tax remained relatively stable at S$2.8 million in FY2024: Under the Group&rsquo s cost structure in FY2024, administrative expenses and other expenses were major components, of which administrative expenses increased marginally to approximately S$3.3 million.

 

The Group&rsquo s other expenses increased by 38.5% or approximately S$563,000, mainly due to higher dormitory and utility expenses as more of its foreign workers were residing at its in-house dormitory during FY2024 (after securing approval from the relevant authorities). In addition, there was more expenses incurred in relation to the Group&rsquo s two newly incorporated subsidiaries, Lincotrade Malaysia and Lincotrade Dongguan during FY2024.

 

Generated net cash of approximately S$5.5 million from operating activities during FY2024: The Group recorded operating cash flows before working capital changes of approximately S$4.3 million and net cash of approximately S$5.5 million generated from operating activities during FY2024.

 

During FY2024, the Group used net cash of approximately S$2.5 million in investing activities and there was net cash outflow of approximately S$4.5 million in financing activities. 

 

Overall, the Group registered a net decrease of approximately S$1.4 million in cash and cash equivalents in FY2024 and as at 30 June 2024, the Group&rsquo s cash and cash equivalents stood at S$11.5 million, of which approximately S$3.8 million of fixed deposits were pledged for bank facilities.

 

Strengthened balance sheet with increased equity and total assets as at 30 June 2024: The Group&rsquo s total assets of approximately S$39.8 million comprise non-current assets of approximately S$15.5 million and current assets of approximately S$24.3 million as at 30 June 2024. 

 

The key components of non-current assets are property, plant and equipment of approximately S$10.9 million and non-current portion of trade receivables of approximately S$4.6 million. The key components of current assets are cash and cash equivalents of approximately S$11.5 million, contract assets of approximately S$2.4 million and current portion of trade and other receivables of approximately S$9.3 million.

 

As at 30 June 2024, the Group&rsquo s total equity stood at approximately S$10.5 million and total liabilities amounted to approximately S$29.3 million, of which total non-current liabilities is approximately S$7.1 million and current liabilities is approximately S$22.2 million. The key components of current liabilities are trade and other payables of approximately S$11.1 million and other financial liabilities of approximately S$10.3 million.

 

Proposed dividend of 0.32 Singapore cents per share, bringing total dividend to 0.70 Singapore cents per share for FY2024: In February 2024, Lincotrade announced the adoption of a dividend policy to distribute at least 20% of the Group&rsquo s consolidated net profit attributable to shareholders of the Company, excluding non-recurring, one-off and exceptional income in respect of any financial year to its shareholders.

 

Combined with the interim dividend of 0.38 Singapore cents announced for 6M2024, the proposed final dividend of 0.32 Singapore cents will bring total dividends to 0.70 Singapore cents for FY2024, which translate to a dividend payout of 52.6% of the Group&rsquo s consolidated net profit attributable to shareholders of the Company.

 

Positive industry outlook in Singapore: According to a media release by BCA issued on 15 January 2024, it projects the total construction demand in 2024 (i.e. the value of construction contracts to be awarded) to range between S$32 billion and S$38 billion in nominal terms.(1) 

 

The public sector is expected to drive total construction demand in 2024, reaching between S$18 billion and S$21 billion, mainly from public housing and infrastructure projects. While private sector construction demand is projected to be between S$14 billion and S$17 billion in 2024, mainly from residential developments under the Government Land Sales, expansion of the two Integrated Resorts, redevelopment of commercial premises, as well as development of mixed-used properties and industrial facilities.

 

Over the medium-term, BCA expects a steady improvement in construction demand and it is projected to reach between S$31 billion and S$38 billion per year from 2025 to 2028. The public sector will continue to lead the demand and is expected to contribute S$19 billion to $23 billion per year from 2025 to 2028, while private sector construction demand is expected to remain stable in the medium term at between S$12 billion and S$15 billion per year from 2025 to 2028.

 

As at 30 June 2024, the Group&rsquo s order book stood at approximately S$39.5 million which generally will be fulfilled during the next two years. 

 

With an aim to expand its order book with a healthy pipeline of new projects, the Group continues to proactively tender for new projects in Singapore, particularly those that are larger in terms of scale and contract value. 

 

In January 2024, the Group announced the receipt of a Letter of Award by JTC Corporation (&ldquo JTC&rdquo ) dated 5 January 2024 in relation to the successful tender of a factory (&ldquo Tuas Factory&rdquo ) located at 5 Tuas Avenue 12 Singapore 639025 with a bid price of approximately S$9.6 million.

 

Larger than its current premises at Sungei Kadut Loop, the Tuas Factory is a leasehold property granted by JTC with a tenure of 20 years commencing from 26 March 2024. The New JTC Property is a 2-storey factory with a land area of approximately 6,498.50 square metres and a gross floor area of approximately 5,490.41 square metres.

 

The Group intends to relocate its operations and dormitories to the larger Tuas Factory and additions and alterations works are being undertaken to cater for the Group&rsquo s business activities and future plans.

 

Expanding the Group&rsquo s business presence beyond Singapore: To enhance its business model and harness new business opportunities beyond Singapore, the Group has set up subsidiaries in Malaysia and the People&rsquo s Republic of China (&ldquo PRC&rdquo ).

 

In Malaysia, the Group intends to expand its business outreach with its niche in interior fitting-out works. And in the PRC, the Group&rsquo s subsidiary aims to strengthen its manufacturing capacity and enhance the quality of its carpentry products.