Review of Popular Holdings Investment Thesis from April 2012


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In 2012, I wrote an article [on my first site] detailing my investment thesis for Popular Holdings. With the recent management buyout offer, I’ve included the initial article written in April 2012. I will conduct a post-investment review in my next post.


Popular Holdings is a common enough household name in Singapore and in this post, I will bring you through my thought process when I examine a business. I have attached the operations and financial review from their latest annual report, and for the sake of brevity, I will only be providing some financial ratios.


My own view is that you should never look at the price of a business before deciding whether to invest in it. The price action (or market capitalization) reveals very little about a business, and that should be your last port of call. Price is what you pay, value is what you get.

It is therefore important to establish what a business is worth before deciding whether to invest in it or not.

Balance sheet strength is what I look for instinctively, and I always examine how leveraged a business is. Although leverage can help boost profits, it can be a different situation in times of financial stress. In this case, Popular Holdings is conservatively financed with a debt to equity ratio of 0.10.

Next, I look at how much equity the business has. Two businesses earning the same amount of money each year are worth a different value if they have differing amounts of equity. In this case, my focus is on liquid current assets.


In this case Popular Holdings had:

Current Assets $290.2 million
Total liabilities $146.3 million
Estimated Worth $143.9 million


This is a quick back of the envelope test that I use when I first look at a business, and before I decide whether it warrants a second look. I normally adjust the values, placing more emphasis on cash and equivalent assets, and impairing assets such as inventories. Next, I do not include non-current assets to err on the conservative side in my calculations. I will include a more in-depth discussion on this in the future.

So now that we have established the business is sound, I turn to look at the profitability of Popular Holdings. If you look at the review of the financial results, you will notice that results for FY 2009 – 2011 were erratic. A little bit of digging reveals that this was due to a non cash impairment of $28.2 million taken in FY 2009, and its subsequent reversal in 2010 ($21.7 million) and 2011 ($6.5 million).

Excluding the effects of the non cash impairments would result in about a net profit of about $10.7 million in FY 2009, $9.5 million in FY 2010, and $17.3 million in FY 2011.

Based on the latest closing price of 3rd August 2012, Popular Holdings has a market capitalization of $197.6 million. Bearing in mind that the figures I used were from the annual report from FY 2011, and not the latest financial results from FY 2012, whereby it reported a net profit of $31.1 million.

So currently, we have a business that’s trading at a trailing P/E of ~6.4, and that has liquid assets of about $143.9 million (based on audited financial results from FY 11). You are essentially obtaining a business for ($197.6 million – $143.9 million) for $53.7 million, and that has generated an average of about $19.3 million in net profit in the past 3 years.

How do I decide whether it makes sense to invest in a business?

Once I have done the necessary research to ensure that I am comfortable investing a company, it really comes down to the price that I am willing to pay. In this case, I want to invest in a business that has an earnings yield (inverted Price/Earnings Ratio) that is at least double that of the triple AAA corporate bond rate (~ 5%). In other words, I want an earnings yield of at least 10%.

In this case Popular fulfils my criteria. If it pays out roughly half its earnings in dividends, giving me an equivalent dividend yield of about 5%, Popular Holdings will only need to appreciate about 5% annually to give me a return of 10% a year. The value of its liquid assets provides an additional draw, making the business much more attractive to own considering that you are paying very little for what essentially is a very profitable business.

Final Thoughts:

This is a very brief summary of my thought process when I look at businesses. Other factors which I look at (but were not discussed) include Free Cash Flow, whether the business is capital intensive and so on. The purpose of this post is to provide you an idea of how I go about researching businesses.

Disclosure: Long Popular Holdings.


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All views and opinions articulated in the article were expressed in Jun Hao’s personal capacity and do not in any way represent those of his employer and other related entities. As at the date of the article, Jun Hao had shares in the Popular Holdings mentioned above.

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