Taiga Building Products

Following on from our analysis of Avarga, we dive into its main subsidiary, which is listed in Canada – Taiga Building Products (‘Taiga’).

Since Taiga is Avarga’s dominant asset, most of the economic analysis is redundant – except for some additional information below.

Taiga is the largest independent wholesale distributor of building products in Canada (comprising 78% of sales). In addition, it sells to the US and parts of Asia.

Its inventories comprise lumber products (70%), allied building products (18%), panel products (11%) and production consumables.

The company recently reported losses for the quarter ending September (which wasn’t available for Avarga) – this seems primarily due to rapidly falling prices of lumber, set against relatively higher inventory costs accumulated earlier in the year.

It also has sales and earnings information stretching further back as Avarga acquired majority control of Taiga only in 2017. Average earnings range between CA $40m and $55m.

The latest balance sheet is strong with net cash of $37m, which included paydowns of the revolving credit facility in the previous quarter.

The equity is currently selling for $243m, which is about 5x average earnings (at the midpoint of the range). 

Industry figures for 2021 indicate higher forecasts for housing starts in Canada and the US compared to 2020. Considering the basic demand for the industry, and the company's prominent position in it (backed up by excellent returns on tangible assets), the stock appears to represent sufficient value for money. Looking back at historic valuations, the market currently values Taiga at a much lower multiple of earnings and tangible assets than in the recent past.

Taiga’s management doesn’t have an explicit dividend policy – and doesn’t pay regular dividends though it issued a special dividend of $30m earlier this year due to its bumper profits. They have engaged in some buybacks at $2.54/share – though these were meager at <$1m outlay.

The investor could get practically the same economic exposure with Avarga – though the capital structure and dividend policy differ – or take complimentary exposures in both stocks.