Sunday, September 16, 2007

Valuation of W Holding (WHI)

I have constructed a model for valuation of the W Holding company, a Puerto Rican bank (ticker: WHI). They are likely to suffer a one time loss over one or more bad loans this year. This model will assume that they have a fixed return-on-assets (ROA) over the immediate future. It assumes a fixed leverage, Assets/Equity. They have preferred shares and so pay a fixed dividend to preferred share holders. They also pay a common dividend. I will assume that this common dividend is a fixed percentage of net earnings (prior to preferred payments, common dividend and one time loss). I assume that common shareholders compound their dividends in a money market account. The following tables show the constants, the key variables, the expected yearly data and finally the results which include a valuation. We discount this to the present to get a Net Present Value which we can compare to today's stock price. All dollar amounts and share counts are in Millions.


Fixed Constants
Name Value Description
NSHARES 164.897 Number of shares
ASSETS 17894.0 Beginning Assets
EQUITY 1147.00 Beginning Equity
PREF 36.9120 Annual preferred payments
LEVERAGE 15.6000 Leverage ratio, Assets/Equity
PREF_EQ 530.800 Preferred Equity
PRICE_NOW 2.11000 Today's Price per share
PE 10.0000
Price-to-earnings ratio for final valuation
PCB 1.50000
Price-to-common-book-value ratio for final valuation
DISC_RATE 0.100000
Discount rate to convert final value to present value

Name Value Description
ROA 0.00800000
Return on Assets
DIV_PAYR 0.200000
Dividend Payout Ratio, fraction of Net Income before one time loss and dividends
LOSS1 170.000
One time after tax loss due to this years bad loans
BB_EQ 50.0000
Equity used to buy back stock in first year
PRICE_BB 2.60000 Average stock price for buy-back

Per Year Data
Year Earnings E. Growth % Dividend Assets (end) Equity Com. Eq. /share ROE ROCE
2007 -26.8480 -126.848 28.6304
15671.9 1004.61 3.25271 -2.34071
2008 125.375 NA 25.0751
16660.8 1068.00 3.68787 12.4800
2009 133.286 6.30974 26.6572
17748.3 1137.71 4.16648 12.4800
2010 141.987 6.52782 28.3974
18944.5 1214.39 4.69287 12.4800
2011 151.556 6.73962 30.3112
20260.1 1298.73 5.27181 12.4800
2012 162.081 6.94444 32.4162
21707.1 1391.48 5.90856 12.4800

Description Value
Final number of shares 145.666
Ending common equity per share 5.90856
Total dividends received per share 1.17726
Total dividends compounded per share 1.32790
Price based on PE = 10.0000 11.1269
Price based on PCB = 1.50000 8.86284
Final Value/share = Av. Price + Total comp. dividend
Net Present Value (discounted at rate = 10.0000%)

The key variable is ROA. I have assumed 0.8% in the example above which is quite conservative. The average ROA for W Holding since 1996 is 1.15%. The max was 1.147% (in 1997) and the min is 0.59% (in 2006). A more optimistic value for ROA would be 1% which would increase the Net Present Value to $9.5/share.

The main thing that I left out was share dilution from stock options which may be considerable. I would guess that there may be about 10 million shares created for management. This would lead to a dillution of 6%.