As if Yellow Pages Income Fund didn't have enough to worry about, what with the dearth of advertising revenue and competition from online directories, it now looks like even its distributions will have to be cut when the fund switches to a corporation in 2011.
Paul Steep, analyst with Scotia Capital, figures Yellow Pages will have to slash its distributions to 67 cents a unit from the current 80 cents a unit when it makes the switch next year.
"This reduced distribution should provide the firm with greater financial flexibility to invest in its online intitiatives," he said in a note Wednesday. "Our view is that given the significant yield at which Yellow Pages's units are trading, the potential ffor a distribution is already reflected in the current price."
For Mr. Steep, the two major reasons for this cut are higher interest costs associated with refinancing in 2009 and ongoing ad revenue pressure related to the recession.
The fund currently trades at a yield of 15.1%, one of the higher yields on the TSX. Investors will likely be looking for a yield between 9% and 11% in 2011, which is comparable to others in similar straits as Yellow Pages — low revenue growth, secular changes impacting core business, an above-average dividend yield, he said.
"We forecast that Yellow Pages's quarterly results are likely to reflect further declines in printed directory revenue in the fourth quarter and the first half of 2010," he said.
The results should trough some time in 2010 though, as online revenues should continue to grow.
Mr. Steep rates Yellow Pages a Sector Perform with a target price of $5.75. He suggests a price of less than $5 a unit is a good entry level and more than $6.25 a good exit level. He also has a lack of confidence in the distribution after 2011, citing the continued decline of print media and print directories in the face of online competition.