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Thursday, June 30, 2005

Yelow Pages @ 1.43 ( Advertising / Singapore ) 15 comments



(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

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.

 

 

15 Comments:

Anonymous Anonymous said...

Hey,

Nice trading blog. Very informative.

Want to swap links? If so please contact me by leaving a comment on my blog.




The Edge.

7/01/2005 4:50 AM  
Blogger The Edge said...

Thanks for swapping links. I have linked back to you now.

There is an error on your link to me though (http://http://theedge.freesuperhost.com/blog/ - you have http:// twice).

Do you do any futures trading? I've been asked to look at Asia-Pac equity index futures and would be interested in hearing the views of a local participant.

Good luck!

The Edge.

7/02/2005 8:12 PM  
Blogger DanielXX said...

Oops.. ok I've rectified the problem. The link to your site should work ok now.

No I don't do any futures trading on my end. I only invest in stocks. You could check up some local forums; there're quite a number of futures players hanging around I believe:

http://info.channelnewsasia.com/bb/viewforum.php?f=13

http://www.bull-fish.com/index.php

www.shareinvestor.com (but this one is now a subscriber-only forum)

7/02/2005 11:18 PM  
Anonymous Anonymous said...

DanielXX

No offense here. But based on historical records, whatever you said can't buy stocks, those stocks have suppressed your "can't buy" price.

Next time you issue a don't buy call for a stock, I think I will make a short term buy on the stock. :-)

7/05/2005 8:06 PM  
Blogger DanielXX said...

Ok Anonymous, fair enough comment. Short term I might not be right on; my picks are mainly based on fundamentals and valuation, so often I think time plays a part.... ha another way is to look back on my earlier calls and ignore my recent calls :-)

7/05/2005 9:24 PM  
Anonymous Anonymous said...

DanielXX,

I can't ignore your call, I must treat it as a buy call :-)

Have a profitable day ahead.

7/06/2005 8:43 AM  
Anonymous Anonymous said...

Please recommend more stocks NOT to buy.

I'll definitely BUY. This is by far the best stock picking website for SGX stocks. Every single stock you single out turned out to be BIG winners!!!

Yellow Pgs is now 1.51...give "reverse pick". Well done!!

7/06/2005 8:43 PM  
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Hey, you have a great blog here! I'm definitely going to bookmark your site!

I have a dummy investing
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Come and check it out if you get time :--)

10/13/2005 6:51 PM  
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10/17/2005 6:54 PM  
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