Avarga (formerly: UPP Holdings)

[weijian]

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?

Hi setan,

The decision to continue with the existing auditor was made (and then voted upon) barely <6 months ago. So what has reasonably changed within this short timeframe? The existing auditor was appointed 11 years ago. Did Tong Junior suddenly had an epiphany?

It takes money to hold an EGM to override the resolution that was voted and approved. So I reckon the epiphany and the "good governance it wants to uphold" must be worth the money spent.

I do not have definition answers to both questions, as I suspect the answers are probabilistic in nature (just like how investing is).

But nonetheless, I do see "similarities" in current action to the previous decision reversals for quarterly reporting and dividend policy.

[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?

Hi setan,

The decision to continue with the existing auditor was made (and then voted upon) barely <6 months ago. So what has reasonably changed within this short timeframe? The existing auditor was appointed 11 years ago. Did Tong Junior suddenly had an epiphany?

It takes money to hold an EGM to override the resolution that was voted and approved. So I reckon the epiphany and the "good governance it wants to uphold" must be worth the money spent.

I do not have definition answers to both questions, as I suspect the answers are probabilistic in nature (just like how investing is).

But nonetheless, I do see "similarities" in current action to the previous decision reversals for quarterly reporting and dividend policy.

Hi Wei Jian,

Thank you for your reply.

Tha abrupt change in corporate actions make me as minority shareholder very difficult to predict and see the direction of the management. We will never know the precise reason for all those changes.

setan

[weijian]

Maybe the follow up question should be "why didn't we do it 5 months earlier then?"

Minutes of the Extraordinary General Meeting of the Company (“EGM” or the “Meeting”)

Why the Company proposed the change of auditor in the midst of financial year?

Ian responded that the Board is of the view that the Company do not need to wait for another 7 months until the next Annual General Meeting and the proposed change of auditor will meet the existing needs and audit requirements of the Group.

https://links.sgx.com/FileOpen/EGM_Minut...eID=736969

[ksir]

Since the response provided is super vague, it's opening up rooms for guessing and speculations.
I'd put in my own GUESS as well (NOT a fact and take it as a pinch of salt):
* Is it because the different opinion in writing-off of the stake in Myanmar Powerplant?
* The difficulties in verifying the figures of Taiga Building (since the Management mentioned the reason for appointing the new Auditor is because it has more relationship/association with Taiga auditor??). But do they even need to verify Taiga numbers since Taiga is listed and published audited numbers as well?

Or....... is this.... the same old same old?? Another episode of low ball offer coming?

[CY09]

Suspicion is that moore stephen has a lower fee as they need to do less work auditing Taiga given that a member firm is auditing the Canadian company

[CY09]

The gem of the conglomerate, Taiga, earning has slowed down due to the slower pace of North America's homebuilder's activity

https://links.sgx.com/FileOpen/Taiga_Int...eID=758166

Previous full FY earnings was already lower than 2021's but this is decline is even more pronounced. I guess the upcycle of Avarga earnings has ended

[weijian]

Tong Junior gave a good summary for the OPMI, as they normally always do. Investing in politically sensitive infrastructure assets in "emerging economies" are always high risk due to (lack of) rule of law - it is always easier to have the rich foreigner to absorb the losses. A good lesson for all of us to (re)learn.

AGM 2022 MoM

1. The bulk of consolidated earnings are from Taiga. Although Taiga did well in FY2021 and FY2022, it decided not to declare any dividend. Taiga is a wholesale distributor of building materials, especially lumber. Lumber prices are highly volatile, they went from US$300-plus to over US$1,600, and now back to US$400 per thousand board feet. Anticipating higher interest rates and a liquidity crunch, Taiga decided against relying on bank credit. The risk to the industry and the supply-chain ecosystem will intensify – with opportunities and resilience to those that are not leveraged.

2. The second cashflow is from the IPP in Myanmar. While we steer through 2022, we are less confident of the operating cashflow for 2023 and beyond. There is no shortage of demand for power, but Myanmar is experiencing a shortage of natural gas, which is necessary to run the IPPs. Consequently, our sales of power to the Myanmar Government fell behind the contractual PPA. This negatively affects our future cashflow and added a level of unpredictability.

3. Finally, our paper plant in Selangor, Malaysia performed badly in 2022, incurring large loss and negative operating cashflow. Selling prices were largely stagnant, but costs rose sharply. The large competitors from China entering the industry had impacted significantly.

4. Meanwhile, Avarga, excluding Taiga, had S$24 million of bank borrowings in Singapore, some of which need to be repaid at the end of the year. Yes, we are not in any dire situation as we can easily meet our obligations, and we have plenty of undrawn bank facilities. But given our expectations of negative economic outlook, higher interest rates for a longer period, a stickier inflationary environment, the decoupling of global supply chains and de-globalisation, we believe a conservative approach to greater corporate resilience and sustainability is the right decision for the Company.

5. Our immediate focus is to stabilise the paper business, turnaround from losses. We have implemented a new strategy on products and operations, after extensive research and review. The past advantages of low energy costs (electricity and gas) are gone and the next key step would be on sustainability. For our power plant in Myanmar, we expect more challenges ahead. It will not get better in the near term. Our options are limited, and we have to be prepared for many scenarios. Taiga wants to, and needs to, further entrench its position in the building materials supply chain ecosystem, as demand for its products is expected to fall with a slower housing market in North America.

6. These account for the decision to preserve capital and to reinvest for growth and resilience.

https://links.sgx.com/FileOpen/AGM_Minut...eID=760412

[ksir]

Avarga at share price S$0.175 has market cap about S$170M.
Taiga at share price C$3.1 has market cap about C$342M or S$315M.
It has 71.8% of Taiga or market value of S$226M.

Super rough MOS about S$226M - S$170M - S$25M (Net Debt at Avarga ex-Taiga) = S$30M.
Little wonder the Boss also can't help to pull his buy at below S$0.17 and so did I.

About S$15M coming soon from Taiga Dividend.
Pay out their debt, sell off the other 2 businesses (if they are unable to turn UPP Msia around) and there you have it, the clean Avarga, which you just have to rely on the resilience Taiga business.
I am quite optimistic in Taiga business.
They still earn such respectable profits duing the lumber downturn this year is commendable.
Taiga is a Distributor but actually is more of a Logistic company.

[weijian]

That is a very small stake that Towkay Tong bought, even wrt to us commoners. I had always felt that Towkay Tong and his son mainly earn their keep via their executive salaries at Taiga.

Relative to the chaotic prices between 2020 to 2022, lumber prices have been stable. And there is a good chance it could be doing at an elevated level from now on. As a distributor, stable prices are more important than high (but unstable) prices.

And when you are a distributor of commodities, the euphemism that you are actually a logistic company sounds much better!

[ksir]

That is a very small stake that Towkay Tong bought, even wrt to us commoners. I had always felt that Towkay Tong and his son mainly earn their keep via their executive salaries at Taiga.

Relative to the chaotic prices between 2020 to 2022, lumber prices have been stable. And there is a good chance it could be doing at an elevated level from now on. As a distributor, stable prices are more important than high (but unstable) prices.

And when you are a distributor of commodities, the euphemism that you are actually a logistic company sounds much better!

Indeed, but if taking consideration of the (cliche) illiquid counter, that has to be a stand (or sign or what have you), from the Boss.
Small ikan bilis like me also struggled in scooping up below S$0.17 tells a lot haha. 
But if anyone is confident about Taiga business and want a cheaper proxy, Avarga is a simple pick (not easy but simple).

And also to add, Taiga has net cash of about 40% of its market cap.
If Interest rate still high, they benefit by getting more interest, if rate turns lower, they can go back to higher leverage and give out more dividend.
Hey Avarga is an investment co, they need $$ to show their value investors skills.

If we understand more about Taiga business and the way the building products are being distributed in Canada, most likely you'd come to the similar conclusion as mine. That their margin is from the efficiency of their logistic and not from wholesale (for commoditiy products, they match the demand, sometimes before they committed purchase, buyer is already there).
It's not accurate to say below:
"As a distributor, stable prices are more important than high (but unstable) prices."
Imo, High prices always better, if you have similar margin, high prices always better. Simple arithmatic should prove that easily.