Directories group Yell may be in line for a return to the FTSE 250 at next month's index reshuffle but its full year results released today make far from pretty reading.
It has written down £1.27bn on its Spanish acquisition Yell Publicidad, pushing it to a £1.1bn loss for the year, and also has to tackle its £4bn debt mountain. Asset sales are one possibility, and Numis Securities reckons a rights issue could be on the cards. Analyst Lorna Tilbian said:
"Although the group's online businesses continue to grow (+38%) its customers remain cautious and there is continued pressure on printed directories. Guidance for the first quarter of 2010 is below our current estimates putting downward pressure on the 2010 full year. The group's gearing remains too high and although current headroom is 15%, we expect this to deteriorate as we move through the year. With a combination of limited covenant headroom, downward pressure on our forecasts and no sign of stabilisation, we still see significant risk for equity investors in Yell and retain our negative recommendation.
"Net debt at the year end was £4.2bn. The group reports that it currently has 15% headroom on its tightest covenant although we expect this to tighten as we move through the year. The group's March 2010 covenant is for net debt/EBITDA of 5.17 times, we currently forecast 5.27 times. The group's bank debt needs to be refinanced by April 2011.
"We estimate that Yell could raise equity through a combination of a placing and an open offer. On our forecasts, a 3 for 1 placing at 20p and an open offer of similar size would raise gross proceeds of £942m and would take net debt/EBITDA to around 4 times. The key variable for new and existing shareholders who follow their rights is the extent of the post-raise rerating. Given that Yell already trades on an enterprise value/EBITDA of 6 times a significant rerating is by no means guaranteed and we highlight that WPP, Informa and UBM trade at only small premiums to Yell."
Goldman Sachs issued a neutral recommendation with a 22p price target, but warned:
"It is now clear that our estimates would result in a covenant breach in March next year, further raising concerns over refinancing a year before the debt would otherwise have been due."
Despite all the concerns Yell's shares have edged up another 0.5p to 46.5p.
