What is in a name? Everything, it seems, for Avarga.
The investment holding company is named after the steppe where the first nomadic capital of the Mongol Empire eight centuries ago was located before it grew to become the largest contiguous land empire in history.
Before its name change in April 2018, Avarga, which was listed on the Mainboard in October 1980, was previously known as UPP Holdings, which stood for United Pulp & Paper Holdings.
According to Avarga’s CEO Ian Tong, the new name is apt to reflect the changing nature of the business as the company had clearly evolved beyond being a paper manufacturing company.
Avarga was not just a capital staffed by administrators and court officials. For the Mongol Empire, it played a more important role as a collection and redistribution centre for goods and resources to the rest of the empire. “I feel that is reflective of our group’s vision,” says Ian in an interview.
From just one business, paper production, new businesses are being “methodically” added. Avarga looks at new ventures “opportunistically”, and along with each new addition, an expansion of its asset base.
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“Critically, we also centralise resources at the group level, which means a more efficient use of capital and therefore a better return to shareholders,” he explains.
Avarga’s executive chairman is Tong Kooi Ong, who is also chairman of The Edge Media Group, the parent company of the publisher of The Edge Singapore. Ian is also an executive director of The Edge Media Group.
At this year’s Centurion Club award, Avarga has been named the company with the fastest growth in profit after tax for the industry sector: Applied Resources; Energy — Fossil Fuels; Mineral Resources, a first for the company.
The companies were scored using their earnings growth over the past three financial years. In FY2016 ended December, Avarga reported earnings of $12.6 million, In FY2019, earnings hit $32.6 million, representing a compounded annual growth rate of 37.4% during the evaluation period.
To be sure, the FY2019 earnings were lifted by a one-off gain of $10.9 million from the sale of a warehouse at 35 Tuas View Crescent. There was also a foreign exchange gain of $3.7 million versus a loss of $6.1 million in the preceding year. More importantly, margins also improved to 11% from 8.9% in the previous year.
Ian appreciates that Avarga has gained this recognition. “It can be challenging for small and mid-cap listed companies to generate investor awareness on our own, so we really appreciate this event and feel proud to be featured,” he says.
“This award is really an acknowledgement of a phenomenal team all the way down to each member of each subsidiary of our group. This reflects everyone’s efforts, we’re thrilled with this, and hopefully, we’ll be back next year,” he adds.
Avarga has three core business activities: Paper manufacturing, power generation and the distribution of building materials. It currently operates across five countries with some 800 employees, and in FY2019, generated revenue of $1.404 billion.
Of the three main businesses, Avarga’s building materials distribution business is run via a Canadian company Taiga Building Products, which is separately listed on the Toronto Stock Exchange.
Avarga, which holds 69.7% of Taiga, acquired the stake in 2017. “The rationale was quite straightforward. In terms of strategy, Avarga’s acquisition of Taiga facilitated a balance sheet deleveraging which allowed Taiga to expand its US network. Building materials demand in the US has been strong, and we feel like our strategy has paid off so far,” he explains.
“We generally do not get hung up on whether a potential target asset is private or publicly listed, or even if it is a new venture necessarily. The transactional process may differ, but the investment metrics we evaluate are the same,” he adds.
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Exploring opportunities
Avarga was in the news in August, after a sudden spike in its share price, triggering a query from the exchange.
As the company responded back then, it was “exploring opportunities” for its paper manufacturing business, which include the expansion and, or a potential listing of this business. It was also considering “a possible transaction which will allow it to monetise its investment in the power plant located in Myanmar.” Last but not least, Taiga had just reported strong earnings growth following strong demand for its products.
In addition, Ian told The Edge Singapore then that the paper production business, which focuses on packaging cardboard, was seeing strong demand because of growth in online commerce, and that the potential listing — if and when it happens — is meant to raise funds to boost production capacity so as to capture this growth trend seen to sustain over quite some time.
At this more recent interview, Ian says the demand for paper packaging remains strong, and that the company is still “exploring various opportunities related to the paper business and will certainly provide updates when appropriate”.
As for Taiga, it did not entirely foresee a jump in lumber prices as there was a congruence of two factors: sawmills cut back production just as the pandemic spread. On the other hand, homeowners took the downtime because of lockdown measures to redo or renovate their houses, driving up demand, thereby, prices.
The anomaly caused by external factors aside, Ian expects Taiga’s business to continue growing at a steady rate that it had already achieved before this year.
“There will always be macro-cyclical dynamics in our industry, but there are a lot of initiatives within our control to continue driving gains — strategic integrations, technological adoption for better inventory and distribution management, improving product lines and mix, and so on — just to name a few,” he explains.
“Lumber prices presented a short-term catalyst this year and we were in a strong position to capitalise on it. However, it is certainly not something we rely on to drive performance,” he says.
“Our profitability does not come from the futures market. Taiga’s business model is to generate earnings by playing a critical role in the housing supply chain, and our focus is on being the most efficient distributor and manufacturer across a wide range of building materials,” he adds.
Since Ian took over as Avarga’s CEO early this year, he has introduced ways to make the company even more shareholder-friendly.
For instance, the company introduced a new dividend policy in June where it would pay out quarterly dividends, which is rare among Singapore-listed entities that are not REITs. Just to put this practice into context, DBS Group Holdings is the only notable big cap other than the REITs to pay quarterly.
Asked about his plans for the next year and thereafter, Ian says Avarga’s plans for 2021 is pretty much the same for the next five years, which is to enable initiatives “to optimise return on equity, increase asset base, and generate better efficiencies in our ongoing business operations”.
“That said, if Covid-19 has taught us anything, it is to always be prepared for the unexpected. However well we plan and prepare, it is all about ability and execution. In other words, it is about the people in our organization. Our combined efforts led to us winning this award, and we look forward to accomplishing greater heights next year,” he says.
