TD
BNN states that a news release from YLO will come out today
Here is TD-Waterhouse analysis view of YLO
Yellow Media Inc. (YLO-T) C$3.83
Bad News, Pressure on Comps Lowers Valuation Multiple Event
Recent negative events and pressure on comparative companies have caused
us to revisit our target multiple and price on Yellow Media.
Impact
NEGATIVE.
The trend for directory stocks continues to be negative and visibility is poor on a turnaround.
Details
There have been several events recently, which we view as negative for YLO.
• Poor results from comp Yell PLC
• Reduced holdings by senior management
• The departure of the company’s Chief Marketing Officer
• The decision by San Francisco to ban unsolicited distribution of Yellow Pages directories
• Declining valuations of comparables
• Balance sheet issues reflected by bond yields.
Outlook
The company is clearly focused on what we believe is the right strategy: increase share of wallet by migrating
marketing dollars from phone book advertisements to online and expanding the number of products and
services at the same time to improve average revenue per advertiser (ARPA). The company’s ‘360 solutions’
product suite is designed to do just that and anecdotal results are apparently encouraging. However, recent
results do not include the impact of this initiative, an impact which we do not expect to see until Q2/11 results
at the earliest and only for a full-quarter in Q3/11. In the meantime, the Q1 results showed a continuation in
the decline of customers coupled with lower average spend, a trend that more than offset good growth in the
digital business.
Balance Sheet Issues Reflected by Bond Prices. Recent pricing on YLO’s public debt has evidenced spreads
of as much as 600 bp over the GOC 10 year bond benchmark. We believe this pricing reflects balance sheet
concerns from fixed-income investors, despite the fact that the official debt rating remains investment grade.
Justification of Target Price
Our new $4.00 target price represents 5.7x F2012 EV/EBITDA, in line with where the shares are currently
trading.
Key Risks to Target Price
• Exposure to the economy and cyclical advertising market.
• Emerging competitive offerings could erode YLO’s current market share.
• Print directory growth may decline faster than expected.
• Risk that new initiatives may not achieve significant penetration and/or that the impact on ARPA may be
less positive than anticipated.
• As an income vehicle for some investors, higher interest rates would reduce the attractiveness of the
company's dividend.
• If EBITDA continues to decline, overall financial leverage may become an issue for the rating agencies,
endangering the company’s investment grade status and having potential implications on the company’s
ability to distribute cash.
Investment Conclusion
In our opinion, this remains a dynamic and difficult situation. We continue to believe that there is a business
here long term, but visibility on what that business looks like is poor. Generally speaking, our view is that the
business 5-10 years from now will be lower margin, more competitive with other operations and likely smaller
than it is today. In addition, we remain concerned about the level of fixed obligations here and the lack of
visible resources to significantly address them after the tax burden increases next year. We believe that our
new target is a fair representation of value 12 months from now, given what we know today; however, this
industry and this company are clearly caught up in negative trends which have to be turned around before we
can reasonably expect growth and multiple expansion.
The current valuation, dividend, and sustainability of that dividend in the short term point to a HOLD rating.