The Q3 result from Avarga was rather disappointing. Its subsidiary, Taiga, was still making a profit when lumber was at 400 USD. But it is now reporting a loss when lumber prices are at 600 USD. It is difficult to make sense out of this. Had they intended to hoard lumber, anticipating another spike in prices as it did last year?

They could have been surprised by the market shift as much as Peloton did. Was it the case that people stopped doing lockdown things once the lockdown has stopped? But its revenue figures do not seem to suggest that completely. Revenue has been higher than two years ago when lumber prices were lower. Also, the company mentioned that their Allied, engineered and treated wood products should counteract the effects of seasonality during Q3 and Q4. These products now account for 48% of Taiga’s Q3 sales. And yet, it does not appear to have stopped the losses this quarter.

I don’t quite understand it. With the business strategy stated, I wasn’t anticipating or expecting Taiga to make a loss here.

Looking at the situation today, it isn’t likely for lumber prices to spike again. Based on the situation as said, it is quite likely that Taiga will incur another quarter of loss. Its fourth quarter has seasonally been its weakest quarter for lumber demand.

This would imply that going ahead, Avarga will not be paying dividend for the next quarter as well. This will be disappointing, to say the least.

Avarga’s other businesses aren’t doing that well either. The paper business has not been profitable, in part due to Malaysia’s MCO orders to stop work due to the pandemic. Its power generation business situated in Myanmar isn’t affected at the moment. But with the recent regime change over to the military junta, it is possible that an abrupt adverse event can happen overnight.

Avarga has been a reliable counter as an income generating source in my portfolio. But its recent actions go against the thesis of my investment. The suspension of dividend makes prudent sense in light of the business environment, but it does not match my investment goals. It is why I had liquidated my entire position.

I have to emphasise that this is my personal decision. I do believe that Avarga has good long term prospects and there will be plenty of money to make. Longer-term investors might want to take the opportunity to buy in whenever there are bargains to be had.

I liked how Avarga was run, especially when senior Tong gave excellent insights to their investments in their annual reports. I had always looked forward to reading them. This isn’t a common trait in other companies in the Singapore Stock Exchange (outside of the big-3 banks?).

Lately, a lot of the strategic movements by the company seem to belay a lack of confidence in their promises. At the start, they announced giving quarterly dividends on a sustainable basis. Then, backtracked from a 40% payout ratio to a 30% payout ratio. Then, shifted that share buybacks is their preferred way of enhancing shareholder returns.

I can believe junior Tong is still working out how to best enhance shareholder returns. But I do not believe that share buybacks, at least in this context, have the positive effect as intended. This strategy might be better applied to NASDAQ or NYSE. But we have to bear in mind this is Singapore we’re talking about. I think dividend payouts is still a better signal in keeping share prices high for SGX.

Besides that, I am still interested in Avarga’s progress. I will still be paying close attention to it for next year. If there’s another opportune moment, it is possible that I dip my toes into it again.