One company that got me interested is Avarga (U09 stock code). The company has three business segments in (i) Building Construction in Canada/US, (ii) Paper Mill business in Malaysia and (iii) Power plant business in Myanmar.
(ii) and (iii) are stable business which have seen little growth and a fall in profits during the last COVID hit year.
Taiga Building Products- a 69% owned subsidiary listed on Canadian Exchange
This segment interests me. Due to the bumper year in Canada and US housing starts, Taiga's profit grew tremendously and the company is trading at 3 time PE on the stock exchange. Analysts in Canada are predicting that Taiga Building products profit was only a one-off event. In the past, Taiga traded at a band of 6-8 times Price Earnings in the Canada Exchange. Its current market cap is valued at C$313 million.
However, I think Taiga is due for a re-rating soon because the housing market in Canada and USA is still booming and Taiga's latest quarter results showed no sign of slowing down with profits higher than the corresponding quarter of last year. This might mean that Taiga's elevated profits will remain for a period of time.
Avarga Share buyback
In the month of May 2021, Avarga had conducted share buybacks at s$0.305-0.315 in the open market. This is a signal that the company thinks its shares are cheap. This has been ongoing since the start of this year and despite the share price having doubled over the year.
In addition, Avarga's dividends has increased as well and it now stands at 1.9 cents based on the past 4 quarters of dividends. At a share price of 30.5 cents, this gives a dividend yield of 6.2%. While Avarga has a sustainable dividend policy where it pays only 40% of its earnings as dividends, it shows that earnings is a function of the dividend yield. Avarga had increased its dividends a lot due to the growth in earnings at Taiga Building.
I am bullish on Taiga's Building Products due to the housing boom in the US and Canada. I did not invest directly because I do not have access to the Canadian Market; hence my interest in Avarga. With Avarga's dividend policy and frequent share buybacks this year, it is a sign that the company is undervalued.
I have not invested in it but am likely to start investing capital due to its high dividend yield and share buybacks.
It is difficult to ascribe a valuation to Avarga because it depends on the North America housing market which has just started to expand. But assuming the housing market is as hot as it is now, this means Taiga can be re-rated to 6-7x PE, a doubling in share price. To avarga, it means an addition of SGD$220 million in value. This represents a 77% upside to Avarga's current market cap of SGD$285 million.