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It’s time to buy Yellow Media again: Canaccord

Yellow Media Inc. logo is shown at the company's quarterly results meeting in Montreal, Thursday, May 6, 2010.


Inside the Market's roundup of some of today's key analyst actions.

Yellow Media Inc. has been fighting for its life over the last couple of years, but the company's recapitalization and aggressive push into digital media have one analyst recommending the stock to investors again.

Canaccord Genuity's Aravinda Galappatthige upgraded Yellow Media to a "buy" rating today (Canaccord had been restricted from covering the stock during its recapitalization), giving the embattled yellow pages publisher a vote of confidence in its future.

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"As Yellow Media emerges from its recapitalization, we see a dramatically improved balance sheet and meaningful strides in the transition to digital," Mr. Galappatthige said in a research note.

Just over a year ago, Yellow Media was saddled with net debt at 3 times its earnings before interest, taxes, depreciation and amortization based on its trailing 12 months of financial results. Now, that figure is down to 1.4 times.

The company's focus on digital is showing some progress. Online now make up 38 per cent of revenues, compared with 26 per cent a year ago.

Nevertheless, further declines in EBITDA and fiscal cash flow can be expected in coming years, especially in 2013, as the company continues to transform to a digital media business, Mr. Galappatthige said.

"We expect that print declines, at least in the near term, will remain elevated (i.e., around the 20-25 per cent range) and the revenue drag will result in fairly steep EBITDA declines over the next three years. However, over time, once the digital investments are made, the cost structure should adjust itself to preserve margins," he said.

He thinks the stock is going for an attractive sale price right now based on his cash flow valuations.

"The stock currently trades at 2x EV/EBITDA 2013E (2.2x 2014E) and 1.2x P/FCF 2013 (1.7x 2014E). This compares with 3.5-4.5x for Canadian print media names (Transcontinental, Torstar, etc.)," he said.

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Target: Mr. Galappatthige set a $13.50 price target. No other analyst currently rates or has a price target on the stock, according to Bloomberg data.


CIBC World Markets analyst Alec Kodatsky is disappointed with Kinross Gold Corp.'s pre-feasibility study of its Tasiast project in West Africa and is now warning investors to stay clear of the stock. He downgraded Kinross to a "sector underperformer" rating from "sector performer."

The study estimated the cost of a scaled-back expansion of Tasiast at $2.7-billion, well above Mr. Kodatsky's estimates. The predicted after-tax internal rate of return of 11 per cent similarly did not impress him.

"We had hoped for clarity, but the future of the project remains highly uncertain with a construction decision still one year away," he said in a research note. "The weak economics draw into question the decision to spend a further $624-million at Tasiast this year and the project appears a pale shadow of past expectations. We think unless gold prices or project economics improve substantially in the next year, the expansion is unlikely to gain acceptance," he added.

He thinks Kinross should seriously consider canceling the expansion. "Management has communicated a commitment to returns and willingness to make tough decisions. Abandoning the expansion of Tasiast places the company in a difficult position, but from a market perspective may prove more palatable than spending significant capital on an unloved project," he said.

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Target: Mr. Kodatsky also cut his price target by $2 (U.S.) to $8. The average analyst price target is $8.62, according to Bloomberg.


TMX Group Ltd.'s first-quarter earnings, set for release on May 10, won't be very uplifting amid the depressed state of the resource sector, warns CIBC World Markets analyst Paul Holden. Trading volumes were down 20 per cent during the period and the value of financings were off 42 per cent from a year ago.

He cut his revenue forecasts for the quarter to $176-million from $192-million, and operating earnings per share to 79 cents from $1.01. He also scaled back his expectations for future equity financings and lower derivative volumes.

"The struggling resource sector is a headwind for TMX. The time for international expansion appears ripe," Mr. Holden said. "We continue to see cost synergies as a key driver of earnings growth (equal to $0.27/share annually)."

Target: Mr. Holden cut his price target by $5 to $54 while reiterating a "sector performer" rating. The average Street target is $53.64.


RBC Dominion Securities downgraded Extendicare Inc. to "sector perform" from "outperform" after the largest long-term care provider in North America slashed its dividend by 43 per cent.

The action to cut the monthly dividend to 4 cents from 7 cents suggests the challenging economic and funding environment is getting worse, said RBC analyst Neil Downey.

"EXE has been operating in a challenging economic and funding environment for some time. Q4/12 US skilled nursing facility occupancy of about 84 per cent is at the very low-end of a seven-year slide, from about 92 per cent in Q1/06," Mr. Downey said in a research note. "And reimbursement has been under pressure with sequestration, caps on therapy, and a looming Medicare Part "B" reduction (effective Jan-14). The foregoing are known factors, yet today's move to preserve cash suggests that things are worse than expected."

Meanwhile, the company's high operating leverage and elevated financial leverage means even small changes in revenue can have a big impact on the bottom line, he said.

Target: Mr. Downey cut his price target to $6.25 from $8.50. The average target is $6.92.


BMO Nesbitt Burns reiterated an "underperform" rating on J.C. Penney Co. as it cut its earnings estimates on the struggling U.S. retailer because of a new loan agreement with Goldman Sachs.

J.C. Penney Monday agreed to a five-year, $1.75-billion senior secured term loan with Goldman at an interest rate of about 7 per cent. The loan, which will be secured by real estate and almost all other assets of the company, will increase interest expense significantly, notes BMO analyst Wayne Hood.

"While the transaction does remove near-term liquidity concerns, it does not change the fundamental challenge facing the company, which is restoring profitable sales growth and now reducing balance sheet leverage," Mr. Hood said in a note.

"There is no doubt in our mind the company can restore sales growth as it implements various aspects of its former high/low pricing strategy. However, restoring profitable growth over a reasonable period of time still looks elusive without further right-sizing of the company's cost structure or a massive increase in sales and market share. In our view, it is easy to cede market share, but extremely difficult to gain share, particularly when the customer is likely to be confused by the repositioned strategy and higher price points," he said.

Target: Mr. Hood maintained a $12 (U.S.) price target. The average target is $16.


For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities

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Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More


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