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Yellow Media’s digital transition seen as ‘substantially ahead’ of rivals

Investors looking for a digital media play that profits from small business growth in Canada are eyeing the second coming of Yellow Media Ltd., albeit with some trepidation in the increasingly competitive mobile and online advertising space.

Shares in the Montreal-based company, known for its Yellow Pages print directory and digital media brands such as YellowPages.ca and Canada411.ca, are up more than 20 per cent over the past year and about 175 per cent since its brush with bankruptcy a couple of years ago.

Yellow Media completed a restructuring in late 2012 and, under new management, continues to shed debt and push its "return to growth" plan, with a focus on boosting digital revenues by growing its customer base and through greater brand recognition.

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"What makes Yellow Media attractive is that it's substantially ahead of everybody else in the Canadian media space in terms of moving from print to digital," said Canaccord Genuity analyst Aravinda Galappatthige, referring to other media companies such as Transcontinental Inc., Glacier Media Inc. and Torstar Corp. He rates the stock "buy."

He raised his target to $30 from $28 last week after Yellow Media said digital revenues accounted for more than half of its sales for the first time, or 52 per cent in the third quarter.

"As Yellow makes progress in its digital transition, we should see significant multiple expansion," he said.

Yellow Media chief executive Julien Billot said the goal is for digital sales to reach 80 to 90 per cent of revenue by 2018.

"Obviously print is declining over time, but we still believe print will be some line of business for us," Mr. Billot said in an interview. "All of our growth is coming from digital."

Mr. Billot, who took the job in January after the departure of long-time CEO Marc Tellier in August, 2013, sees Yellow Media as proxy for economic growth in Canada, especially for small business.

"If an investor believes local will be a growing part of the economy in the company years, then definitely Yellow Pages is the right vehicle for this," he said.

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About 90 per cent of its digital revenues are from online advertising, most of which is sold on its own websites and mobile applications.

Yellow Media is investing heavily in promoting its brand, which includes changing its name back to Yellow Pages next year, as well extensive advertising campaigns to promote properties such as its YP mobile application. Those investments have weighed on its earnings in recent quarters, causing the stock to sag in recent months to just below $19 per share today, down from a 52-week high of $25.52 in late March.

Risks for the company include competition and an economic slowdown that could cause businesses to spend less on advertising, analysts say.

"While successful implementation of the company's return-to-growth plan could produce considerable upside for investors, execution challenges are not insignificant, and profitability should remain under pressure in the near term," said RBC Dominion Securities analyst Haran Posner in a note.

He has a "sector perform" on the stock (similar to a "hold" rating) and recently increased his target to $22 from $20 as the company continues to chip away at its debt and reported higher mobile penetration and digital visits in the third quarter.

"It's a tough business," said Paul Gardner, a partner and portfolio manager at Avenue Investment Management, which was part of a bond group that restructured the company in 2012.

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Today, Mr. Gardner's company owns the convertible debentures and is counting on Yellow Media to continue paying down its debt and drive its digital growth.

"They are still a free cash flow business," he said. "They still have a lot of clients out there."

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About the Author
Contributor

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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