- Final dividend increased 6x to S$0.03 (FY17: S$0.005)
- Special dividend of S$0.015 declared (FY17: NIL)
- Total dividends payable on 24 May 2019 = S$0.045 (19% yield)
- Normal dividends adequately covered by the group’s free cash flow
- Potentially a sustainable 16% dividend yield play
- Zero Growth Dividend Discount Model projects a target price of S$0.38 (Cost of Equity = 7.8%)
Avarga announced its FY18 results on 23 Feb after market hours. While its results were nothing to shout about, what was interesting was the dramatic change in the firm’s payout policy. The company increased its final dividend by 6x from 0.5 cents to 3 cents. Based on the current share price of S$0.235, this represents a yield of 12.8%. In addition, a 1.5 cent special dividend was declared due to the successful divestment of the group’s Tuas property for S$18.6m. With total shares outstanding of approx. 944.032m, this meant that almost all of the proceeds from the divestment is returned to shareholders. If we include the special dividends, total dividends payable on 24 May 2019 is 4.5 cents or a 19% yield.
Source: Avarga 4Q18 Results, p.15
Source: Avarga 4Q18 Results, p.16
Source: Avarga 4Q18 Results, p.17
Sustainability of Dividend
While the bump in dividends came as a surprise (as seen in the price gap up), what is paramount is the sustainability of the normal dividends (3 cents). Should it be sustainable and management adopt 3 cents per annum as the new dividend policy (previously 1 cent per annum), we could see Avarga being the highest yielding (16%) counter listed on the SGX. I got 16% by calculating the theoretical ex-div price of S$0.19 (= S$0.235 – S$0.045) compared with the 3 cents final dividend.
I did a back-of-the-envelope calculation of the free cash flow available to shareholders of Avarga for FY18 as shown below. Note that Taiga is at least 65.1% owned by Avarga (Taiga has been buying back shares), so I had to make adjustments in the consolidated statement of cash flows of Avarga. Assuming C$/S$ = 1.03.
After making some adjustments, I ended up with S$36.58m in free cash flow available to shareholders of Avarga. With 944.032m shares outstanding, a 3 cent cash dividend would require S$28.32m. This appears sustainable given its dividend commitment represents 77% of Avarga’s adjusted free cash flow available for shareholders (viewed another way, a cash buffer of S$8.26m).
The assumptions here are that Avarga can at least maintain its current level of profitability and cash flow generation, as well as the C$/S$ pair being stable (a strong C$ bodes well for Taiga and vice versa).
Zero-Growth Dividend Discount Model
Avarga’s cost of equity according to Bloomberg is 7.8%. Assuming zero-growth in dividends, the dividend discount model projects a target price of S$0.385, representing an upside of 64%. Even if we use a higher cost of equity of 10%, the implied target price turns out to be S$0.30, representing an upside of 28%.
I like that Avarga’s management is changing its payout policy to return more excess cash to its shareholders. We should see a gradual re-rating in Avarga driven by yield-seeking investors should management decide to formally adopt a 3 cent dividend policy or continue paying a 3 cent final dividend per annum in the future. In the meantime, patient shareholders can expect to receive generous dividends.
Thank you for reading.
Disclaimer: I am vested.
History of Increasing Dividends
Avarga has been consistently paying dividends since 2011 with periodic increases over the years. Note that the dividends computed by Shareinvestor for Dec 2018 should be 3 cents instead of the 2.5 cents shown. Also, it should have displayed the Special Dividend of 1.5 cents. This means that the full year yield should have been 21.3% (0.5+3+1.5) instead of 12.766%.
Recent Share Buybacks Provide Support Level
Avarga was conducting share buybacks frequently between Oct-Nov 2018 at prices between S$0.198-0.220. This suggests that management deem such price levels to be undervalued. Investors, on the other hand, could view this as a support level.
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