Avarga (formerly: UPP Holdings)

[fallscushion]

Alternative view of Avarga:
https://fallscushion.wordpress.com/2018/11/29/avarga/

Priced at S$0.2, Avarga has market cap of about S$200M.
Price is what you pay, Value is what you get.
What Values?
1. Myanmar Powerplant business
What were the annual revenue recognised since then (exclude 2014, since it’s not full year):
Note: assuming tax rate is 20%
2015: S$11.9M, PBT: S$7.8M, NP: S$6.2M
2016: S$13.3M, PBT: S$8.1M, NP: S$6.5M
2017: S$11.7M, PBT: S$6.9M, NP: S$5.5M

Estimated based on 2018-9M revenue for future earning:
Revenue: S$10.0M, PBT: S$5.9M, NP: S$4.7M

2. Malaysia Paper Mill business (UPP)
Note: assuming tax rate is 20%
2012: S$48.7M, PBT: S$3.8M, NP: S$3.0M, NP Margin: 6.2%
2013: S$46.8M, PBT: S$3.8M, NP: S$3.0M, NP Margin: 6.5%
2014: S$47.8M, PBT: S$4.9M, NP: S$3.9M, NP Margin: 8.2%
2015: S$49.2M, PBT: S$6.4M, NP: S$5.1M, NP Margin: 10.4%
2016: S$50.0M, PBT: S$7.9M, NP: S$6.3M, NP Margin: 12.6%
2017: S$54.3M, PBT: S$8.3M, NP: S$6.6M, NP Margin: 12.2%

In recent years, the margins were abnormally high due to China’s ban of waste disposal which caused the waste paper price to be low (thence lower UPP cost).
I expect the margin to normalise to 9-10% (average of the last 6 years was 9.5%).

Estimated based on 2018-9M revenue (and average margin) for earning power:
Revenue: S$56.4M, PBT: S$6.7M, NP: S$5.3M
From the above, if the Margin reverting to Mean, the NP will be around S$5.3M.
The yield from this business unit is 2.7%

In total, from the 2 business units, we will get about 5% yield.
which is also about S$0.01 per share(also happened to be the dividend for the recent few years).

If the 1 cent dividend (total about S$10M) is sustainable (which I argue it is), it should provide satisfactory return to me.

My expectation is not high and the bonus should come from the result of Taiga Canada (the 3rd business unit).

Falls.Cushion_

[ksir]

Announced 4.5c dividend (3c final + 1.5c special dividend).
The dividend yield on last price before announcement of about S$0.2 is over 20%.

This is rather mind boggling.
Even with today price it's still over 18% yield.

Noted that the 3c is actually final and 1.5c is special dividend from the divestment of Tuas building.

Do they have that much if free cashflow to sustain 3c? I pretty much doubt that, considering no dividend from Taiga (or maybe it is coming??)

and for now I wonder whether they have that much of excess cash to distribute out over $40M??

Your guess is as good as mine!
Get more debts?



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[ghchua]

Hi ksir,

Avarga invested in Taiga via common shares and subordinated notes. The income from their investment in Taiga comes from those notes, rather than common shares.

With the restructuring of subordinated notes, I guess Taiga going forward would be in a better position to pay dividends with reduced expenses from those notes.

[ksir]

Hi ksir,

Avarga invested in Taiga via common shares and subordinated notes. The income from their investment in Taiga comes from those notes, rather than common shares.

With the restructuring of subordinated notes, I guess Taiga going forward would be in a better position to pay dividends with reduced expenses from those notes.

yes, but as you mentioned, the subordinated notes are converted to taiga shares (at C$1.2).
They no longer hold any notes.
Their cash in from taiga will be merely from dividend.

Taiga didnt announce dividend this year due to major acquisition of exterior wood.
The business has not been performing well even since restructuring.


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[ghchua]

[Taiga didnt announce dividend this year due to major acquisition of exterior wood.
The business has not been performing well even since restructuring.

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When you said the business had not been performing well, which part of the business are you referring to? They are profitable for financial year ending 31 December 2018.
http://www.taigabuilding.com/sites/defau...t_-_q4.pdf

[ksir]

[Taiga didnt announce dividend this year due to major acquisition of exterior wood.
The business has not been performing well even since restructuring.

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When you said the business had not been performing well, which part of the business are you referring to? They are profitable for financial year ending 31 December 2018.
http://www.taigabuilding.com/sites/defau...t_-_q4.pdf

Before the subordinated note restructuring, they have been able to pay 14% interest every year and while still earning abit of bottom line (bottom line still positive).

Now, if you take in 2018 bottom line and minus off the (supposedly) subordinated interest, likely will get negative!

Of course such is rough and not taking into consideration of tax deduction from subordinated interest expense.

In general, what I am trying to convey is that, the conversion reduced the company value of both the noteholders and shareholders.

The gist is that, they have been able to pay out 14% interest for years and expecting them to pay the same out as dividend is likely unlikely (at least at current slowdown in housing).



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[fallscushion]

Avarga owns about 65% of Taiga Building Products and it's the largest profit contributor to Avarga.
The rough valuation of Taiga:

At price of C$1.07, Taiga has Market Cap of about C$125M.

In high building seasons (Mar-Sep) or Taiga’s Financial report Q2 & Q3, they roughly earn about C$9-11M in bottom line.

In cold season (Oct-Feb), Taiga roughly earns about C$3-6M.

In short, it will, by and large, earn about C$12-17M per year.
At least in average across building cycles, it should earn about C$14-16M per year.

With that, the expected return on investment will be roughly 10% – 15%.

[ksir]

A very good sharing by Avarga new CEO (next gen).

https://links.sgx.com/1.0.0/corporate-an...dfdf75d740

The part on the capital allocator is rather simple & clear that it reflects their clarity thinking.

Dividend will be quarterly and at least 40% net earning.

Rather amused by their business units which actually are all essentials and remain operating amidst Covid, albeit of course lower top lines.

The way Management trying their best to communicate and explain the business to shareholder is rather extraordinary and to that kudos.


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[weijian]

A very good sharing by Avarga new CEO (next gen).

https://links.sgx.com/1.0.0/corporate-an...dfdf75d740

The part on the capital allocator is rather simple & clear that it reflects their clarity thinking.

Dividend will be quarterly and at least 40% net earning.

Rather amused by their business units which actually are all essentials and remain operating amidst Covid, albeit of course lower top lines.

The way Management trying their best to communicate and explain the business to shareholder is rather extraordinary and to that kudos.


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Slide deck3 is something that is usually churned out by an investor. Examples on this forum include what Boon or Karlmarx has kindly shared in the past.

2nd generation Tong looks like a fan of Warren Buffet with a quotation from him as the wrap up and the "general mood" in transcript like below probably makes WB proud of him:

Finally, I just want to say that while we have worked hard on growing your company over the years

Avarga has 3 very different businesses. Will be interesting to see how this capital allocator works them out and improve the return of capital.

[ksir]

Unexpected good 2020-H1 result from Taiga Building:
https://links.sgx.com/1.0.0/corporate-an...6f56e31289

Noted the Canada Wage subsidy of about $3M (but even without that, the net earning is commendable).
Housing start is unexpectedly strong in US and picking up fast in Canada.
The lumber price shot up to the top (from about $350 to $650).
Since their margin (distribution commission) is a percentage of Sales Price, imo, margin should improve.

It seems to me that Management has chosen the better option to return money to Shareholder via Share Buyback instead of Dividend.
Dividend in Canada came with the Withholding tax.

Avarga 2020-H1 is rather good as well:
https://links.sgx.com/1.0.0/corporate-an...bf1a275e1b

The only question mark is, why not following the dividend payout target (40-50%) that they have just announced in AR-2019?
The reason for such payout target (according to Mr Tong in AR2019) is to increase visibility and certainty to the Investors?
So why now cut it down to 20%+ and with no mentioning of any justification?

I'm not really complaining though.
In this Covid-19 crisis, their businesses are quite well positioned (unexpectedly even to me as a very long times investor since UPP).
All 3 businesses seem to be essential and are all still running in this pandemic.

Vested, Core.