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Avarga Limited

Avarga is listed in Singapore and is primarily engaged in the wholesale distribution of building (lumber) products in Canada (~75% of revenues) and the US (~20%) – which contributes over 90% of sales and profits. It conducts this via its 71.8% equity interest in Taiga Building products (‘Taiga’) listed in Canada (valued at SG $193m at market).

It’s also engaged in manufacturing paper/packaging products in Malaysia (used for e-commerce), and electricity generation in Myanmar.

Looking at the consolidated financial statements, the group generated bumper sales and profits in the last twelve months due to exaggeratedly higher lumber prices that hovered over US $1,000/mbf (‘1000 board feet’). Lumber prices are currently below $600/mbf.

Average revenues since 2018 amounted to $1.7b (70% of TTM revenues of $2.4b). Applying average blended profit margins of just under 5.5% yields $95m of ebitda and $60m in after-tax profits – which equates to average cash from operations in the past four years.

The latest interim balance sheet as at 30th June reveals net debt of $153m – that represents a moderate debt/ebitda multiple of 1.6x. The non-controlling interests represent $84m.

At the current market cap of under $250m, the equity sells for just over 4x after-tax earnings (and just under tangible asset value) if average earnings can be taken as a guide to the future, which is far from certain considering volatile lumber prices.

Management aims to pay out 30% of net profits as dividends. This appears reasonable as management intends to reinvest Taiga profits; at returns on tangible assets that exceed 20%/year, the resulting growth would be attractive. Management have paid special dividends during the bumper year; and is engaged in buybacks around the current market price.

Though most sales are dependent on housing construction/renovation in Canada/US; an index of average earning power for the company suggests a reasonable margin of safety for this stock at the current price.

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