The Trouble with Taiga Building Products (TSX:TBL)… What’s next? And what is Avarga (SGX:U09) anyway?

Here’s the latest from Canadian Value Investors:

-The Trouble with Taiga Building Products (TSX:TBL)… What’s next? And What is Avarga anyway?

-Whitehaven ASX:WHC - Update on coal prices

-The Great De-levering of Canadian Oil and Gas

Whitehaven ASX:WHC - Update on coal prices

Disclosure: We still own this.

Oil prices are always in the news, but coal prices are typically much-less-so. Here’s a quick update for fellow coal-holders on the benchmark price most important to them. Operating performance at Whitehaven remains in line with expectations.

The Great De-levering of the Canadian Energy Sector

Despite much higher oil and gas prices, the industry continues to de-lever and underinvest. We are still long Suncor and MEG (though much less bullish on MEG).

https://boereport.com/2023/01/19/boe-intel-production-and-capex-guidance-trends-for-2023/

The Trouble with Taiga Building Products (TSX:TBL)… What’s next?

The Trouble with Taiga Building Products (TSX:TBL)… What’s next?

Disclosure: We own TBL and shares of the parent, Avarga Ltd. SGX:U09

Back in February 2022 we wrote about Taiga Building Products. We encourage you to read that article first before this update, but TLDR Taiga is Canada’s largest wholesale distributor of building materials, such as lumber, panels, etc, and now has a large footprint in the U.S. west coast after an acquisition in 2018. It is still trading at a low multiple, but has a wide range of potential future earnings, and is effectively debt free after a debt exchange and subsequent further reductions aided by a COVID boom. So the question is, now what?

We decided to dig back into this with:

1) A financial update.

2) Background on the effective parent, Avarga Ltd., which now owns ~72% of the Company, and whose share ownership in Taiga is now larger than its market cap despite other operating businesses (interested now?).

Financial Update

Our February 2022 article was before their 2021 year-end, which we have now added. The COVID bump continued.

They have released their Q3 results obviously. However, we have not included/annualized them for the chart above given seasonality and volatility, but their YTD results below tell the story.

The Company is now totally de-levered and has ~$100MM of cash. We note though that the business is seasonal with significant capital required in the spring for inventory build up.

Canadian Value Investors 2022 Performance Review

Here is the latest from Canadian Value Investors!

  • 2022 performance review

  • Current portfolios

  • It could have been worse – Returns from around the web

  • Line goes up – The problem with NFTs - for subscribers

    2022 performance review

    Both the CVI model portfolio and Diversified portfolios performed relatively well (literally) in 2022 as noted below, but on an absolute basis the performance was disappointing. However, if we can continue to beat the S&P 500 by 10% a year that would be something. Here’s to 2023. 

    Our energy investments performed strongly as did various special situations we have discussed previously. However, some misses ate up those gains and, similar to Warren Buffett and Charlie Munger, we prefer to focus on our mistakes to learn from them.


Key Lessons

The most avoidable mistake was Warner Brother Discovery (WBD). Discovery’s merger/takeover of Warner Brothers from AT&T (we were a shareholder of Discovery pre-merger) was a textbook example of 1) the thesis changing, but more importantly 2) a spin-off sale that had a high chance of massive selling pressure. For those that did not track this situation, AT&T sold its Warner Brother division by merging it with Discovery and providing its portion of ownership in the entity directly to AT&T shareholders; i.e. AT&T shareholders ended up with an AT&T share and a share in WBD. It was tax efficient for AT&T, but is a textbook scenario of creating a pool of unhappy WBD shareholders. We imagine that many AT&T shareholders had no intention of ever owning something like WBD and became natural sellers. Compounding the problem is this combined newly levered-up WBD entity now needs 2-3 years to merge and get its combined online-Netflix-fighting platform up and running while interest rates are rising, and inflation is raging. This is not a recipe for a good time. We still like the potential of the combined entity, but we should have at least bought puts to protect ourselves.

An error of omission was Tesla puts. Rising interest rates and frothy inflation is the perfect recipe to knock down inflated valuations, never mind crazy executive suite antics to really get the fire going. Some long-dated OTM puts we priced in the spring of 2022 would be up about 30x at this point and still have some life left. We do not mind this miss that much, as this felt and still feels like too close to gambling.

Selectively Writing Call Options

This has been an area of success for us, specifically with MEG Energy and Activision Blizzard. We have wrote about both previously. Available for subscribers.

Current Portfolios

We have two portfolios here at CVI, the Model Portfolio and the Diversified Portfolio.

We strive to follow our own principles ( https://www.canadianvalueinvestors.com/value-investing-101 ), namely:

  • Being concentrated (figuratively by focusing our efforts on the best hunting grounds and ideas we find, and literally by having only a few positions).

  • Building in a margin of safety in our analysis.

  • Betting big when the odds are in our favor.

Our current portfolios are as follows. Changes since the last subscriber update:
-Model Portfolio – Purchased Philips PHG (see January article provided for subscribers) using proceeds from wind up of special situations and trimming ATVI.

-Diversified Portfolio – Purchased PHG using proceeds from wind up of special situations.

It could have been worse – Returns from around the web

The S&P is upsetting on a one-year basis, but much less dramatic with a longer lens.

 Maybe some things are just going back to where they should be…

Q3 Earnings Releases - Here are the most important third quarter updates on our holdings

Here is the latest from Canadian Value Investors.

Q3 Updates on:

  • Whitehaven Coal – The Coal Train Rollercoaster

  • MEG – Buybacks good, and the Oilsands Alliance invoices are coming

  • Suncor – Teck deal thumbs up

  • Supremex – What a first month

But first, a few things from around the web:

The Crash of Crypto and FTX – The fall of FTX reminds us of the bucket shop speculation craze in the 1800s/early 1900s. FTX’s collapse is quite something. “It’s not like a normal [bankruptcy] filing where you’re lining up papers literally for weeks,” said Eric Snyder, chair of the bankruptcy department at law firmWilk Auslander, which isn’t part of the case. “Within 24, 48 hours this was on the ropes and done.” Yikes. Pretty wild for a firm that was valued at $32 billion. https://www.bloomberg.com/news/articles/2022-11-13/ftx-falls-into-bankruptcy-so-fast-court-papers-get-left-behind

John Hempton on FTX collapse – “In some sense crypto provides fast-track learning as to why we have banking and broker regulation in the first place.” http://brontecapital.blogspot.com/2022/11/ftx-and-old-blog-post.html

Andrè Kostolany: The Great Stock Market Operator Never Heard Of – An interesting overview of a man who made a fortune in things like defaulted German and Soviet Union bonds. “I am an oversea trader. I trade what others oversee.” (Andrè Kostolany) - https://undervaluedjapan.substack.com/p/andre-kostolany-the-great-stock-market

François Rochon of Giverny Capital Inc. Interview – “My rule of three: One year out of three the stock market will go down, one stock out of three that you purchase will be a disappointment, and at least one year out of three you will underperform the index. I think when you accept that the start you deal better with market fluctuations and mistakes you make with securities.” https://podcasts.apple.com/ca/podcast/we-study-billionaires-the-investors-podcast-network/id928933489?i=1000585977081

Portfolio Update – November 2022: What do you do when positions double?

Here is the latest from Canadian Value Investors:

-Portfolio Updates – Our Concentrated Portfolio and our lower-risk Diversified Portfolio

-What do you do when positions double? (i.e. thoughts on Portfolio Rebalancing)

-Berkshire Hathaway - Concentration and Energy

-Suncor Energy TSX:SU – The Power of Buybacks

-Ideas Around the Web including META, India, and gambling with Interactive Brokers

Portfolio Updates

Our energy holdings have done quite well given the current climate; a few puns intended. We note that two of four positions pre-date the Russian invasion of Ukraine (Suncor, MEG), while two are after (Vermillion, Whitehaven Coal), although we have also added to Suncor again a few months ago (see the Power of Buybacks below).

Before we get into where we are going, let’s talk about where we are at today. We keep two portfolios, a higher-risk Concentrated-with-a-capital-C portfolio, and a less concentrated version that has a lower expected return, but much lower risk given its focus on larger companies and more positions in general. As we constantly remind ourselves, the more positions you have the harder it becomes to outperform the index. We encourage you to check our Value Investing 101 – Concentrated Investing section for the math - https://www.canadianvalueinvestors.com/value-investing-101