It’s not often a house broker withdraws an investment recommendation on a corporate client. But it happened on Thursday – to Yell.
Bank of America/Merrill Lynch moved from a “neutral” recommendation on the heavily indebted directories business to “No Rating”. Analyst Paul Sullivan offered the following explanation.
We find it is increasingly difficult to ascribe a current value to Yell’s shares, given significant uncertainty on refinancing.
Specifically,
Guidance points to covenant risk
FY09 results were broadly inline with expectations, but 1Q10 guidance from Yell highlights a risk of covenant breach by end December/ March 2010. The auditors are expected to publish an “emphasis of matter” statement in the accounts pointing to the risk of a breach. If this event were to occur, the banks could theoretically demand full debt repayment, undermining the ability of Yell to act as a going concern. As a result, we believe that Yell will need to refinance its debt within the next 6/9 months to avoid this. So how might Yell do this? Sullivan says a rights issue would be a tall order, so a combination of a capital raise and a haircut for debt investors could be the way forward.
We believe 3.5x EBITDA is more prudent, which based off our FY11e EBITDA target of. c/.£700m, points to an optimal debt load of c.£2.5bn, some £1.4bn below estimated year-end FY10 levels (£3.89bn).
Compared to a market cap of c.£350m a rights issue appears a tall order. For example, even if we were to assume the share price doubles to nearer 100p, a £1.4bn rights issue at 50p would reduce EPS to c. 9p and increase the ex. rights PE to c. 7x. It is also not clear that the current shareholders would have the appetite for such a large cash call.
Of course it is not that simple and a combination of an equity infusion by existing and/ or third parties coupled with a debt re-fi (whereby some debt holders may need to share some of the pain) could be the way forward.
The company is a corporate broking client of Merrill Lynch International in the United Kingdom: Yell Group Plc.
Shares in Yell were 5p lower at 40p in afternoon trade.
Related link:
YELLow Directors – FT Alphaville