Avarga (formerly: UPP Holdings)

[specuvestor]

Imo, High prices always better, if you have similar margin, high prices always better. Simple arithmatic should prove that easily.

Just to add higher prices also implied higher working capital and lower ROIC. That's what happened to commodities player during the commodities boom in 2007-09

[ksir]

Imo, High prices always better, if you have similar margin, high prices always better. Simple arithmatic should prove that easily.

Just to add higher prices also implied higher working capital and lower ROIC. That's what happened to commodities player during the commodities boom in 2007-09

Yep concur with that, Taiga would not have consistent high ROE if not because of the high leverage for their working capital. Now that they opted for Net Cash (fund their own working capital due to higher interest), don't think they can sustain high ROE unless they give out more dividend. 

A remarkable attribute of their business model is they can generate high revenue turnover, it's about 3-4 times a year. It seems to me, their model of matching demand & supply do work pretty well.

Also just to highlight why I think it's a logistic model instead of wholesale is mainly bcos logistic in Canada is challenging, the long haul requires good mix & match utilizing the capacity per trip, unlike in Sg whereby distance is short and logistic is a rather commodity business.
So generally big items + long distances make the logistic rather tough and hence need scale + experience to do well in long run.
For that, I believe Taiga has done well.

[weijian]

hi ksir,

I have to admit that I have not dwell much into the specifics of Taiga's business and rightly got called out by you. My earlier study on Avarga was mainly focused on it as a holding company.

I have studied a couple of distributors and many of them are stuck in the middle (not able to raise prices on their end customer while their suppliers pass on the costs to them). I remember that the Tongs have said that Taiga value add with its distribution ability (peculiar to Canada's large land mass relative to its infrastructure/building density) and so they probably take a "pretty fixed" percentage of the invoice amount charged to their customer. In this case, you are right to say that higher prices = more revenue (Tong may have said something like this too but I can't recall).

That said, my earlier comment "As a distributor, stable prices are more important than high (but unstable) prices" refers more to the instability than the "high" itself.

Finally, if one is optimistic on Taiga, wouldn't it be better to buy Taiga? Any payment upwards to Avarga as a Taiga shareholder will guarantee that the latter get paid cash, but not for the Avarga shareholder. Example, Astra International had a coal windfall and paid an "enhanced" dividend to its parent Jardine Cycle and Carriage in 2023. JCC then used the dividend to pay down its debt. The Astra shareholder got the full cash dividend but the JCC shareholder didn't. Of course, this doesn't mean that the JCC shareholder didn't benefit.

There will probably always be some Taiga-Avarga discount because there is the additional holding company resulting in "loss of control". Based on what Tong Junior has done in the last 2 years, is the discount been undervalued?

[ksir]

hi ksir,

I have to admit that I have not dwell much into the specifics of Taiga's business and rightly got called out by you. My earlier study on Avarga was mainly focused on it as a holding company.

I have studied a couple of distributors and many of them are stuck in the middle (not able to raise prices on their end customer while their suppliers pass on the costs to them). I remember that the Tongs have said that Taiga value add with its distribution ability (peculiar to Canada's large land mass relative to its infrastructure/building density) and so they probably take a "pretty fixed" percentage of the invoice amount charged to their customer. In this case, you are right to say that higher prices = more revenue (Tong may have said something like this too but I can't recall).

That said, my earlier comment "As a distributor, stable prices are more important than high (but unstable) prices" refers more to the instability than the "high" itself.

Finally, if one is optimistic on Taiga, wouldn't it be better to buy Taiga? Any payment upwards to Avarga as a Taiga shareholder will guarantee that the latter get paid cash, but not for the Avarga shareholder. Example, Astra International had a coal windfall and paid an "enhanced" dividend to its parent Jardine Cycle and Carriage in 2023. JCC then used the dividend to pay down its debt. The Astra shareholder got the full cash dividend but the JCC shareholder didn't. Of course, this doesn't mean that the JCC shareholder didn't benefit.

There will probably always be some Taiga-Avarga discount because there is the additional holding company resulting in "loss of control". Based on what Tong Junior has done in the last 2 years, is the discount been undervalued?

Hi Weijian,

Actually I made the same assumptions previously as well and "looked-down" on Taiga "commodity" biz until I dive deep into Sr Tong super-frank description of Taiga business model then I started to understand more of the nature of Taiga biz model. More deep dive into their competitors (which are not as well managed, but good earning as well) and the lumber industry from some lumber specialist got a better understanding into how US & Canada lumber industry are. 

Extreme instability is definitely bad, but instability of going high is still far more preferred than going low, because of their high inventory turnover, in 1-2 years time the margin got balanced out. High price, higher revenue, higher gross profit, similar staff, distribution, admin cost.. so we got better bottom line.

I did switch from Avarga to Taiga back then when Avarga hovering at S$0.26-0.33 as UPP & Myanmar PP done well and Taiga price was C$0.8-1
Reason why I picked Avarga now is mainly because Avarga is just cheap. 
It's a cheaper proxy than  if I'd to buy Taiga now.
Because people are valuing Avarga UPP & Myanmar business as minus which I don't think so. 
But even yes, they have 0 value, I still pay less (Avarga) to get more (Taiga).

[ksir]

Avarga AR 2023 is out.

Anything that starts with should be rather interesting (quoted from the CEO Message):

I would like to start my statement with three quotes
from Warren Buffet:
“Risk comes from not knowing what you are doing.”
“It takes twenty years to build a reputation and five
minutes to ruin it.”
“The best chance to deploy capital is when things
are going down.”

Although I've invested in Avarga since Mr Tong Kooi Ong era, tbc, I don't understand the relevancy of the 2nd quote.

But I do concur with 1st & 3rd quotes.

Imho, both Tongs are good capital allocators.
But with current situation of UPP Msia & Myanmar units (and the concluded 3Cnergy), "bad businesses" are ahead of the good Management.

Again imho, they are more like Buffett era before Munger (this includes Boustead's FF Wong). Good value investors & capital allocators but not in buying great businesses.

But with the current Avarga market cap of below S$180M, it is just a very cheap proxy for Taiga. 
I believe Taiga worst is likely over. With its accumulated cash, Ian's 3rd quote is super relevant.

<vested and deep fishing whenever there is idled cash> 

[weijian]

Avarga, as the holding company seems to be a learning vehicle for Tong Junior. When we look at its very nice summary table, on hindsight, was the company too aggressive in returning capital? Now that is trading at ~50% discount to NAV, any EFR would be very dilutive. Maybe Tong Junior wants all of us to believe that the best time to deploy capital is when things are going down?

Taiga doesn't seem to be paying too much money upwards. Will it change in future or capital will be retained at that level to expand in North America?

The 2 remaining "bad business" is carried at ~32mil at book value on the balance sheet, after a ~30mil drop in FY23 as a result of real business and accounting book value losses. How much would it fetch on the open market?

[weijian]

Unfortunately, I have to say that the person who asked the below question, doesn't understand accounting principles for subsidiary. Actually, the amt of dividends paid out by Taiga (without checking out Taiga's announcements) can be calculated by referencing the "Dividend paid by a subsidiary corporation to noncontrolling interest" under cashflow statement and then normalized to Avarga's ownership.

But this question also reveals a 15% tax when Taiga pays upwards. So inclusive of a ~15% conglomerate discount, the base scenario would be a minimum 30% discount for Avarga's trading value wrt to its ownership portion of Taiga. This is assuming the remaining assets are zero for simplicity sake.

ANNUAL GENERAL MEETING TO BE HELD ON 18 APRIL 2024 RESPONSES TO SUBSTANTIAL AND RELEVANT QUESTIONS RECEIVED FROM SIAS AND SHAREHOLDERS

Q16. The dividend received from Taiga, why it is not reflected in the cash flow statement? Is the dividend received from Taiga taxable? If yes, what is the tax rate?

Avarga: The intercompany dividend was eliminated at the group cash flow statement. Yes, dividends from Taiga are taxable in that if it flows up to Avarga, which is a Singapore domiciled company, there is a 15% Canadian withholding tax

AGM Q&A
https://links.sgx.com/FileOpen/Responses...eID=796416

[setan]

Unfortunately, I have to say that the person who asked the below question, doesn't understand accounting principles for subsidiary. Actually, the amt of dividends paid out by Taiga (without checking out Taiga's announcements) can be calculated by referencing the "Dividend paid by a subsidiary corporation to noncontrolling interest" under cashflow statement and then normalized to Avarga's ownership.

But this question also reveals a 15% tax when Taiga pays upwards. So inclusive of a ~15% conglomerate discount, the base scenario would be a minimum 30% discount for Avarga's trading value wrt to its ownership portion of Taiga. This is assuming the remaining assets are zero for simplicity sake.

ANNUAL GENERAL MEETING TO BE HELD ON 18 APRIL 2024 RESPONSES TO SUBSTANTIAL AND RELEVANT QUESTIONS RECEIVED FROM SIAS AND SHAREHOLDERS

Q16. The dividend received from Taiga, why it is not reflected in the cash flow statement? Is the dividend received from Taiga taxable? If yes, what is the tax rate?

Avarga: The intercompany dividend was eliminated at the group cash flow statement. Yes, dividends from Taiga are taxable in that if it flows up to Avarga, which is a Singapore domiciled company, there is a 15% Canadian withholding tax

AGM Q&A
https://links.sgx.com/FileOpen/Responses...eID=796416

Hi Weijian,

As I'm one who is not accounting trained and would like to learn, in this case, did Avarga receive the dividend distributed by Taiga? Where can we know it is received? Or is it just consolidated in the cash flow statement like the company's reply "The intercompany dividend was eliminated at the group cash flow statement" and do not show anywhere.

Thanks in advance if you are able to give a pointer.

setan

[donmihaihai]

Unfortunately, I have to say that the person who asked the below question, doesn't understand accounting principles for subsidiary. Actually, the amt of dividends paid out by Taiga (without checking out Taiga's announcements) can be calculated by referencing the "Dividend paid by a subsidiary corporation to noncontrolling interest" under cashflow statement and then normalized to Avarga's ownership.

But this question also reveals a 15% tax when Taiga pays upwards. So inclusive of a ~15% conglomerate discount, the base scenario would be a minimum 30% discount for Avarga's trading value wrt to its ownership portion of Taiga. This is assuming the remaining assets are zero for simplicity sake.

ANNUAL GENERAL MEETING TO BE HELD ON 18 APRIL 2024 RESPONSES TO SUBSTANTIAL AND RELEVANT QUESTIONS RECEIVED FROM SIAS AND SHAREHOLDERS

Q16. The dividend received from Taiga, why it is not reflected in the cash flow statement? Is the dividend received from Taiga taxable? If yes, what is the tax rate?

Avarga: The intercompany dividend was eliminated at the group cash flow statement. Yes, dividends from Taiga are taxable in that if it flows up to Avarga, which is a Singapore domiciled company, there is a 15% Canadian withholding tax

AGM Q&A
https://links.sgx.com/FileOpen/Responses...eID=796416

By your reasoning, one need to also apply a focus discount on Delfi and Micro Mechanics. Each paid withholding tax on dividend received from their wholly owned overseas subsidiary or subsidiaries. 

Withholding tax does not identify whether a company is part of an overseas conglomerate or part of an overseas a focus group.

Cashflow statement is most useful when a listed holding company has a listed subsidiary. But when the holding company has many subsidiaries with NCI, then it is not so easy, especially for unlisted subsidiaries. What more some group lump dividend paid to shareholder and NCI together in cashflow statement. So, a better place to look might be the group change of equity statement.  

As for withholding tax, tax note is the best place to read, and one can apply whatever discount one think is appropriate from the number glean from this note.

But well, I like to think about it as if 2 listed companies of the same businesses, same return and the so called market valued one with NCI say 30% lower valuation than the other one without NCI due to the discount applied for showing dividends to NCI, then I would certainly invest in the one with discount when both are within the valuation that I like.

[donmihaihai]

I think I replied to Setan in most part except for the case where subsidiaries are wholly owned. Then, the only place to find is company change of equity statement where the income the company received will be dividends from direct subsidiaries but this way of looking is so rough that it is better off not trying to find out.

Anyway, there is no point looking at how the money flow within a group unless there are special insights to be gleaned. There are cases but most of the time, just to assume the money flow around within the rules.