Avarga Limited (U09): 1Q18 Results Review, Hidden Asset

Introduction

It has been more than 2 weeks since Paper, Power, Taiga was written. Since then, both Taiga and Avarga released their 1Q18 results. I thought it would be good to review their results and consolidate new developments into this article.

Taiga’s share price has since risen 16.7% from C$1.37 to C$1.60.

On the other hand, Avarga has remained unchanged at $0.25. If we include the recent dividend of $0.005, the gain would be 2%.

Taiga Share Price.PNG

1Q18 Results Review

Taiga  1Q18 Results

Taiga 1Q18 Snapshot.PNG

Taiga’s 1Q18 results exceeded my expectations, I was previously forecasting 10% sales growth with 8.4% gross margin. Actual sales growth and gross margins were 13.5% and 9.5% respectively. As mentioned in my previous article, lumber prices are a good gauge on the level of sales. As a result of operating leverage and the loan note restructuring, EBITDA and Net Profit Margins strengthened from 2.7% and 0.1% to 3.5% and 2.1% respectively.

On outlook, management expects the Canadian housing market in calendar year 2018 to taper off slightly compared to calendar year 2017. For the US housing market, management expects it to continue to improve in the 2018 calendar year compared to calendar year 2017.

In Canada, according to the Canada Mortgage and Housing Corporation (“CMHC”) Housing Market Outlook, Canadian Edition for the fourth quarter 2017, housing starts are forecasted to range from 192,200 to 203,000 units in the 2018 calendar year. CMHC is reporting that housing starts will range from 192,300 to 203,800 units in the 2019 calendar year.

In the United States, the National Association of Home Builders reported in March 2018 that housing starts are forecasted to total 1,247,000 units in the 2018 calendar year and 1,292,000 units in the 2019 calendar year.

With both housing markets with bright outlooks into 2019, Taiga is poised to deliver better results this FY18.

Furthermore, lumber prices have risen another 4% from 586 to 609, even though the past 2 trading days saw sharp declines. According to analysts at Bloomberg Intelligence, lumber prices are expected to continue rising thanks to a confluence of import tariffs, transport bottlenecks and strong housing demand. This certain bodes well for Taiga.

As we head into a seasonally stronger 2Q, coupled with lumber prices at multi-year highs, Taiga’s 2Q results should be even better. Historically, Taiga’s 2Q and 3Q (homebuilding season) are the strongest quarters, represented about 55-60% of full-year revenues.

Lumber prices.PNG

Avarga 1Q18 Results

Avarga’s 1Q18 results were below my forecast/expectations as I failed to accurate account for the non-controlling interests of the strong performance delivered by Taiga. In addition, 1Q18 earnings were dragged by FX losses of $4m due to CAD and USD weakening.

Paper business exceeded my expectations, delivering 7% sales growth due to higher ASPs. Gross margins strengthened from 18% to 22.3%.

Power business was below expectations as operating and maintenance income decreased 39% due to lower electricity generated and sold.

All in all, the main growth driver of Avarga moving forward is Taiga, how the latter performs will significantly affect the former. With management intending to up its stake in Taiga to 64.8% post-Kublai, more earnings will be consolidated into the group.

 

Hidden Asset

 

 

From Avarga’s 2017 annual report, the group has been trying to sell its Tuas factory since 2014. As can be seen in pg 99 of the AR above, the book value of the factory currently stands at $7.7m. It has recently been relisted for sale here, at a guide price of $27m. Given the recent property upturn, the group might be able to divest this asset for up to a $19m gain on disposal.

Kenny Chia

Undergraduate, SMU

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