Yellow Media makes a quiet comeback

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While the phone book itself is of little use in a digital age, Yellow Media Ltd. has landed with renewed relevance on the doorsteps of investors.

One year past a restructuring of its massive debt load, the company has realized a little progress in repositioning itself and a whole lot of stock upside in the process.

Yellow Media is up by more than 150 per cent over the last year, largely on an improvement of its finances and the ability to service its debt. But the stock doesn't yet reflect the company's ongoing transformation from a publisher of directories to a digital media business.

"With a little bit of ingenuity, these guys could actually turn this ship around," says Keith Richards, portfolio manager at ValueTrend Wealth Management in Barrie, Ont. "Now you can see an awful lot of momentum behind the stock from a technical perspective."

Not long ago, Yellow Media was tainted by obsolescence. The company rode the fading appeal of its printed directories all the way to near-complete value destruction. Its stock fell from a 2006 peak of $16.65 to 6 cents by the end of last year. A recapitalization plan last December gave creditors control of the company in exchange for debt relief.

Markets moved past Yellow Media. Investors lost interest, credit rating agencies downgraded the company's debt to junk status and all but one sell side analyst dropped coverage.

Few were anxiously anticipating the company's resurrection.

But in April, Canaccord Genuity analyst Aravinda Galappatthige applied a "buy" rating, citing a "dramatically improved balance sheet and meaningful strides in the transition to digital."

In his latest note to investors, Mr. Galappatthige reported on further progress in Yellow Media's move away from print.

As print revenue continues to fall precipitously – down 23 per cent in the third quarter – the company is cutting costs related to publishing, of which 300 layoffs announced last month are a component.

Meanwhile, the mass shift of resources to digital projects has lifted the Yellow Pages mobile app into the top 10 among Canada-based apps, according to the company.

He has set a target share price of $18.70, based on an enterprise value of three times 2015 earnings. That multiple could rise toward five times, he said, if free cash flow stabilizes and digital revenues continue to account for a larger share of Yellow Media's business.

But improving business prospects are not yet factoring into share price, said Glen Bradford, chief executive officer of ARM Holdings, which has owned Yellow Media securities for two years.

"The appreciation in equity is [proportionate to] the company's pay-down in debt from free cash flow," he said. Soon, he predicts, the stock will rally on more than debt fundamentals.

So far, investors are reluctant to buy into the idea of Yellow Media as a viable entity sustained primarily by online revenue.

"It doesn't get as much attention as it probably deserves," Mr. Richards said. "A lot of people got burned on the stock because it was touted as a safe income trust back then. … There's still a lot of [investor] anger."

Even ratings agencies are slow to revisit their beliefs on the company. DBRS still rates Yellow Media's debt as triple-C, even though all tranches are trading above par for the first time since the restructuring.

"The market is saying the credit ratings agencies are wrong," Mr. Bradford said.

"A year ago, people hated it. Right now they're cautiously optimistic. In a year or two, it's my perception that people will love this."