Yelow Pages @ 1.43 ( Advertising / Singapore ) 15 comments
(P.S: Sorry for any disturbances the advertisements above may have caused you)
1.High debt and servicing payments
2.Unsustainable dividend payments
3.Limited revenue growth
In this blog site, I usually highlight stocks that have reached high prices and are generally viewed optimistically. For Yellow Pages this might not be the case since it recently announced a rather poor set of results; however looking at the volume it appears to be still rather popular; so here I am.
Clearly this stock is still overpriced despite the recent correction from $2. Even after the price drop it is still trading at 16X trailing earnings and 2X book value. Where is the attraction?
There are two main attractions. Firstly, the dividend yield, which looks even better after the recent price correction. The declared dividend for the full year was nearly 12 cents, which now converts to a yield of 8.3% based on current price (see above). Secondly, its perceived "blue-chip" status, and its stable cash flow of about $20M every year (from its cash flow statement, after subtracting interest payments).
However, look at the problems with this company. The key one must be its high debt($130M at last count), which it has to both trim and service every year. For the last FY, it trimmed off $60M of debt and paid interest of $10M. For the former, it was able to do so because of re-capitalisation through IPO and bond issues. For the latter, it is more than half of operating profits (before interest). Even bearing in mind that these interest payments are likely to drop every year as debt is trimmed further, one wonders how much of the debt can be repaid annually from now on. It was the IPO which enabled the company to trim its debts by such a large amount of $60M; such trimming of debt is likely to be substantially less in coming years.
What does this mean for future dividends? If revenue does not grow substantially, net profit is likely to be stuck at $10-15M in the foreseeable future due to large interest payments off operating profit. The FY04 dividend amounts to $19M; how can it be sustained? Clearly even for FY04 the dividend was partially paid from IPO money, since net profit was only $10M. And note that it was split as 6.5cents final and 5.3 cents special; from my experience this often signals that the later portion is one-time and not expected to be repeated the coming year.
I have focused on the high debt and unsustainable dividend yield but of course one should also note the high PE and P/NTA valuations already stated above, as well as the problem of low revenue growth. The business of Yellow Pages is such that every additional page of advertisement will net it further revenue but nearly zero additional costs; ie. it experiences continuous economies of scale. Thus it would be an attractive business if revenue keeps on growing. However, its historical revenue record is poor, declining from $82M in 2002, a recession period, to $60M in 2004 (a recovery year!).
No wonder Singtel was keen to dispose of the Yellow Pages operation to a bunch of institutional investors (investment banks and so on) 1-2 years back who packaged it and then IPOed the company in 2004. The stock price might have dropped a lot but this company is an example of one not to buy even given such a decline in its equity price.