February 3, 2006-- Workers pass by a Yellow Pages reference room in their Montreal offices on February 3, 2006. For Business. Globe and Mail/Christinne MuschiChristinne Muschi/The Globe and Mail
Yellow Media Inc. shares took another beating Monday, falling more than 6 per cent to record lows.
The stock is now down 22 per cent since mid-April, and the company's annual yield is sitting at a sky-high 17 per cent - typically a warning sign that the dividend may be cut.
National Bank Financial analyst Adam Shine cut his price target by $1 to $4 today (he maintained a "sector perform" rating) but dismissed worries that Yellow Media may not be able to meet its debt obligations.
"In short, we don't see default risk at YLO, just further downside risk in its stock as estimates gravitate lower and multiple contraction runs its course as seen across the publishing sector," Mr. Shine said in a note late Monday.
The analyst says some investors are worried that Yellow Media is heading down the same path as Quebecor World, a publishing company that also had a burdensome debt load. The company ultimately was forced to file for creditor protection in early 2008 after debt refinancing plans fell through in the early days of the credit crisis.
Although Yellow Media faces similar fundamental challenges to its core business, the directories publisher is not in danger of breaking loan covenants, Mr. Shine points out. It's preoccupied right now with recent divestitures (most notably its Auto Trader assets) and buying back stock under normal course issuer bids.
While he's confident the company will be able to continue to pay creditors, he's less sure when the stock can rebound.
"While we expect little in the way of material news from YLO over the next two months, it's important to note that the company will report what we expect will be another relatively soft quarter when it reports Q2 results in early August and concurrently updates 2011 guidance, which will reflect a third consecutive year of downward revisions. The latter may very well trigger further adjustments to consensus expectations and drive targets lower," he said.
He also cautioned that the yield may not be sustainable given the possible need to divert cash flow to debt reduction.
At the end of March, YLO's net debt was $2.873-billion, including preferred shares, according to Mr. Shine.
A Yellow Pages Group spokeswoman could not be immediately reached for comment.
Darcy Keith