Investment Column: Yell could be on the verge of a revival
Computacenter; UK Coal
Wednesday 13 July 2011
Our view: Speculative buy
Share price: 11p (+1.51p)
Is there something to Yell about at last for yet another business struggling to cope with the impact of the internet revolution? To be sure, investors in the company have had a torrid time in recent years. The publisher of the Yellow Pages once counted itself a member of the corporate aristocracy, holding a place in the FTSE 100.
But with interest in its printed offering waning, combined with vicious competition in the online arena, its decline has been rapid and brutal, so much that it has is now a small cap.
You only have to look at the overall fall in revenue (12.4 per cent) and the fall in print revenue (18.6 per cent) outlined in its May results presentation to see the problem.
All of a sudden, however, the shares are showing signs of life. What's driven the recent uptick is two deals: the announcement of a strategic alliance with Microsoft to provide advertising for small and medium businesses, together with the acquisition of privately owned Znode for about £12m. The latter, an ecommerce company, should extend Yell's access to smaller businesses.
These both come ahead of the unveiling of a new strategy on Thursday, about which management is being understandably coy. But the market is getting excited – the shares are up by more than 50 per cent since that results presentation.
On valuation grounds, Yell is cheap. This is a company that makes a profit but the shares value it at just one times forecast earnings for next year, although it still has a heavy burden of debt, equivalent to five times earnings before interest, tax, depreciation and amortisation.
In the end, deciding whether or not to buy the stock depends on two clear questions: do you think Thursday's strategy day, combined with two interesting little deals heralds a turnaround? And do you back a newish management team to pull it off? On balance, we think it might be worth a speculative investment, as the company is certainly a prime candidate for a revival. That said, given Yell's history, we wouldn't be afraid to run at the first sign of trouble.
Our view: Buy
Share price: 463.1p (+3.1p)
Computacenter cheered analysts yesterday with what Panmure Gordon termed a "very pleasing" update.
Profitability in the first half of the year will be "comfortably ahead of the same period last year", it said. The six months to the end of December saw revenue growth of 6 per cent, with the company showing strong growth in France and Germany.
On the downside, the fly in the ointment was weak product revenues from clients in the financial services industry, which contributed to a slightly disappointing performance in the UK market.
Offsetting that, the company's outlook was solid, as it remains on track to meet full-year hopes, despite being held back in the second half by an increase in its depreciation charge. This, however, has been well flagged and should be priced into the stock.
Beyond 2011, it said, "we are encouraged by our progress, particularly in our managed services business, which we believe can present a cornerstone for Computacenter's growth in the years ahead".
Panmure analyst George O'Connor estimates that earnings per share will rise from 33p in January last year to 37.9p at the end of 2011 and 42.9p a year later, believes this is a good buying opportunity. We agree.
Our view: Buy
Share price: 37p (unchanged)
Last summer, we abandoned UK Coal, reasoning that the company was not in a position to capitalise on the upward trend in coal prices.
Our concern was down to what were fairly grim half-yearly results. Nearly one year on, yesterday's trading update was much better.
Net debt, excluding restricted cash, stood at £207m at the end of June, down from £242m at the end of last year. Total first half production was 4.1 million tonnes, well ahead of the 2.7 million tonnes over the same period last year. The average realised selling price was also encouraging, partly owing to high market prices, and partly because of the reduction in deliveries under older legal contracts.
All this means that UK Coal once again looks like a recovery play. If the company can keep growing production, unlock value from its landholdings and cut debt, there is ample scope for upside gains.
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