Avarga (formerly: UPP Holdings)

[fallscushion]

Both yours and Mr Tong’s statements are right.
It is just a difference of time horizon.

In short term, gross margin fluctuates greatly due to inventory gain/loss (as you have pointed out using that particular quarter result).
So you are right, gross margin fluctuates, could even go minus.

In long run, gross margin will go toward their average margin of lets say 4% which is what Mr Tong was referring.

If you are short term speculator, your view is totally right.
To me, I am looking to hold this through cycles, hence eventually Mr Tong will be right.

[weijian]

As usual, there are no surprises for Avarga's latest results. There is also a change in dividend policy. From a dividend policy of min 40% of NP (exclude one-offs) paid quarterly (June2020), it was reduced to 30% for FY20 results (Feb2021). FY21 results (Feb2022) removed the entire policy. This series of changes within 2 years isn't very flattering.

Personally, I never understood why Avarga BOD would institute a "minimal dividend policy". Yes, the Tongs have espoused themselves as capital allocators and would return "excess capital when not in use" but you do not need to have a minimal dividend policy to do that.

Going forward, the Board would like to announce the cancellation of the Dividend Policy, for the following reasons:
1. The future operating environment in some of our businesses may be more challenging due to local conditions and other businesses have its own capital allocation strategy and growth trajectory plans; and
2. As expected, central banks around the world have begun raising interest rates to battle inflation, leading to more realistic market expectations. The Company believes the prudent approach is to preserve capital to take advantage of opportunities that may arise.

The Board will continue to endeavour to maintain a balance between meeting shareholders’ expectations and prudent capital management.

Avarga FY21 results: https://links.sgx.com/FileOpen/2HFY2021_...eID=704010
Taiga 4Q21 PR: https://links.sgx.com/FileOpen/Taiga_New...eID=704006

Cancellation of dividend policy: https://links.sgx.com/FileOpen/Avarga_Di...eID=704011

[fallscushion]

Exactly, it’s rather weird to tie their hands with fixed dividend payout policy.

It’s not very effective to pull C$ from Taiga via dividend, partly due to 1) withholding tax 2) increasing working capital due to higher lumber/panel price 3) speculatively, perhaps Taiga is eyeing certain opportunity and hence no dividend albeit having record earning and substantially net cash.

The no-dividend announcement stone hits few birds though:
1) Increasing the buyback opportunity (both Avarga & Taiga) as some dividend chasers chasing for exits.
2) Preserving capital for opportunities ahead.
3) Removing the constant ”problem” of Management converting Taiga C$ to pay Avarga 40% dividend payout
(while handing over additional 15% to Canada Gov).
Buying back Taiga shares (preferably cheaply) is the best way to return C$ to Avarga.

[ksir]

Another outstanding quarter result of Taiga:
https://www.taigabuilding.com/sites/defa...t_-_q1.pdf

At current price of C$2.71, market cap is about C$300M while NAV has reached C$2.81.
Their Q1 earning is already C$39M
(Q2 & Q3 are seasonably higher sales, but heck, I am not in delusion of expecting the abnormal high earning).
It's a given that Lumber price will fluctuate and may go down tremendously fast, short term will be a pain to bottom line (due to their treated lumbers inventories). Longer term earning should normalize.
At the moment, it's still reasonably cheap.

On another note, Avarga has ceased to report quarterly business update:
https://links.sgx.com/FileOpen/Cessation...eID=716226

Quote:
"The Board has, after due deliberation, taking into consideration the collective time and effort needed
to compile and prepare the necessary documents and announcements required to report the quarterly
business updates"

I reckon that in itself is nothing wrong, if the intention is to extend longer term view of shareholders.
But how difficult it is to update business summary to shareholders every 3 months?
I reckon they would have monthly revenue numbers for UPP Malaysia & Powerplant, no?
Taiga quarterly numbers are there as well?

So it seems Avarga is turning from a "super" shareholder friendly to a more "Rigid (take it what have you or if don't like, sell)" type of company?
Below are merely some bla bla bla disappointed views from a long time shareholder:
* Never mind, dividend policy is gone as we can't tell Taiga what to do with their $$ albeit we owning over 70%?
* Never mind, we don't need to update you quarterly as it is hard to compile the data and don't think you need to know?
* Never mind, with the share price going down, we don't buyback as we think we know better (wait & time the market)?
* Never mind, we don't think shareholder appreciate our "super" shareholder friendly dividend policy as the share price is still depressed, albeit it has doubled from about 0.15 to about 0.30 during that period?
We decided to instead go the other extreme? to serve what end? hit the price low enough to go private?

[weijian]

I for one, prefer semi annual updates than quarterly ones. For an OPMI, it is better on 2 folds:

(1) Makes the bar higher as direct information is not easily available and hence it favors those who are able to come up with more creative indirect ways. Temperamentally in the long run, quarterly and semi reporting doesn't really matter (or at least that is what I hypothesize)

(2) Personally, it frees up my time to do other productive endeavors that include looking for the indirect ways (avoid the curse of the Tragedy of the Commons), or really just spend quality time with people who matter!

From what transpired in the last 2 years, I get a feeling that Tong Junior had tried too hard to make themselves share-holder friendly - via the quarterly dividend guidance and reporting. Unfortunately the subsequent U-turns rebounded and it turned out for the worst. On hindsight, the thing that really mattered was the pandemic itself creating a super tail wind for their distribution products (and Tongs' pay)

[ksir]

If you're a passive investor in your partner business.
He used to provide Quarterly Financial Statement to you, but was scrapped off as it's no longer required by regulations.
Fine, he then provided you business update quarterly instead.
But now he tells you, it is too difficult.
You then think you need to find it from "more creative indirect ways"? Why?
He no longer treats you as much partner as before, no?

[weijian]

Hi ksir,

Just to clarify, my preference was for my own investing experience in general and not targeted at Avarga.

And I think your disappointed views are justified because I see all the u-turns rebounding on itself and making things worst. From perception, they did themselves a disservice, although I believe nothing significant has changed about their attitude or business.

[ksir]

Hi Weijian,

Totally agree that nothing significant has changed on their business or attitude towards business.

However by flip flopping, they made it really hard for shareholders to align with them.
What kind of shareholders do you really want to target?

When they provided dividend policy, their intention was to provide more certainty to Investors.
As the logic goes, the certainty will boost the share price as Investors love certainty (and I'd argue it did achieve exactly that).
The dividend policy also likely invited tons of shareholders who rely on dividend as part of their investment approach (aka income investors). By putting up honey, you get bees.

Now by going the other extreme fast & furious, they introduce back the uncertainty and I don't think they appreciate the impact it does to those shareholders who had previously aligned with them.

Think enough of my "whining" hahaha.
Just need to vote with my feet and get out right? or just go Taiga instead!

[weijian]

Think enough of my "whining" hahaha.
Just need to vote with my feet and get out right? or just go Taiga instead!

Well, when they installed the dividend policy, I thought it actually made sense to look at Taiga because Taiga would have to pay upwards to allow the holding company to fulfill its dividend policy.

But with the dividend policy, the bees may be removed from the holding company (Avarga) and maybe the conglomerate discount may become more attractive. End of the day, Avarga is Taiga and it doesn't look like it is going to change much unless they make meaningful new acquisitions. The Tongs have also extracted much from salaries from Taiga in the last 2 years and they may be easily ready for an Avarga's cash call to fund a meaningful acquisition.

Although I have to admit these are just my very qualitative views without much in depth quantitative studies/comparison.

[setan]

Avarga proposed to change auditor and convened an EGM on 30 Sep 2022.

https://links.sgx.com/1.0.0/corporate-an...9890173e9f

I have questions to ask any experienced VBs here.

1) Is it normal to change audit in midst of financial year?
2) Does it warrant a red flag?