Yellow Media Inc T.YLO

From Disnat on YLO

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Here is Disnat's take on the divestiture (detailed text follows):

Yellow Media Inc.

Rating Buy–Above-average Risk

Target C$6.35

Symbol YLO

Exchange TSX

Sector Consumer Discretionary

Closing price C$5.50

Potential return 27%

52-week range C$5.00–6.98

Shares O/S 516m FD

Market cap C$2,838m

TSX weighting 0.17%

Year-end Dec-31

Revenue 2011E C$1,422m

2012E C$1,425m

EBITDA 2011E C$830m

2012E C$833m

EPS 2011E C
.94

2012E C
.95

LTM ROE 4.2%

Net debt/total capital 39%

Dividend C
.65

Yield 11.8%

Quarterly data

EPS 1Q11E Desjardins C
.17

Consensus C
.19

Highlights

Automotive assets sold for C$745m. On Friday (March 25), Yellow Media announced the sale of its automotive assets to Apax Partners for C$745m at an implied EV/EBITDA multiple of 10.8x. We expect the deal will close by the end of 2Q11. Apax is executing a plan to consolidate the global automotive information category; as a result, we believe this strategic interest allowed Yellow Media to achieve a premium multiple for its asset sale.

Company’s future still hinges on directories. The fundamental crux for Yellow Media remains the same—the trend of the directories business will continue to drive the company’s performance. Previously, we had expected directories to account for the vast majority of the overall business. This expectation remains unchanged.

Dividend remains within target payout range, though now at high end. Based on our new 2011 adjusted EPS estimate of C
.94, the C
.65 annual dividend represents a payout ratio of 69%, which remains within the company’s target payout range of 60–70%, though now at the high end.

Expecting C$500m of debt retirement, C$245m of share repurchases. We expect Yellow Media will use the C$745m proceeds of the transaction to reduce debt by C$500m. This should reduce the company’s leverage ratio to 2.9x by year-end 2011. We believe the remaining proceeds of C$245m will be used to fund a share buyback, which should lower dividend requirements.

Valuation

We value Yellow Media using two methods—a three-stage DCF model and an EV/EBTIDA multiple assessment, with the average of the two determining our one-year target of C$6.35 (previously C$6.80). Our three-stage discounted cash flow valuation utilizes a WACC of 8.9% and incorporates our explicit forecasts for 2011–12, a medium-term growth rate of 2% for 2013–17 and a terminal growth rate of 0% beyond 2017. Our DCF model yields a one-year target value of C$6.40 and is equivalent to applying an EV/EBITDA multiple of 7.5x and NOPLAT multiple of 11.9x on our 2012 estimates. For our EV/EBITDA valuation, we apply a 7.0x (previously 7.5x) multiple on our revised 2012 EBITDA estimate of C$833m, which results in a one-year target value of C$6.32 (previously C$6.86). We have lowered our valuation multiple by 0.5x due to the recent decline in PagesJaunes’ multiple and a slight reduction in our online growth expectations.

Recommendation

While we are pleased with the multiple the company realized on the sale, a higher portion of YLO’s earnings will now come from its print directories business. However, as was the case prior to the transaction, the company’s future will continue to hinge on the directories segment. Although we expect a 7–8% decline in print directory revenue in 2011, we maintain that Yellow Media is taking the necessary steps to profitably transition its business in an evolving media ecosystem and participate in the current growth of online advertisements. We currently expect directories’ organic revenue to increase in 2012 as online initiatives grow and print revenue declines decelerate. Our analysis indicates the annual dividend of C
.65/share is manageable and should be funded by free cash flow. We view this dividend payout rate as sustainable so long as the company’s financial performance does not deteriorate substantially from current trends. Hence, we do not believe Yellow Media’s dividend is at risk of being cut. We believe the high yield of 11.8% should continue to attract investors, especially given the current low interest rate environment. The total expected

return of 27%, including the dividend and potential upside to our target price, warrants a Buy–Above-average Risk rating.