November 9, 2010 6:43 pm

Yell shares drop 20% as sales fall gains pace

Shares in Yell fell more than 20 per cent after the publisher of the Yellow Pages directories reported an unexpected worsening in the rate of revenue decline in the second quarter, with sales sapped by low confidence among small and medium-sized businesses.

The company’s bleak outlook for the second half overshadowed news of the appointment of Michael Pocock, previously of Linksys and Polaroid, as chief executive.

In the six months to September 30, revenue fell 8.9 per cent to £895.7m ($1.4bn), from £982.8m in the first half of 2009.

In the second quarter, organic revenue declined 12.1 per cent at constant exchange rates, missing guidance of 11 per cent.

John Davis, the outgoing finance director, said third-quarter organic revenue was now expected to be down about 12 per cent in constant currency terms, compared with previous guidance of 9 per cent, and warned of little improvement in the fourth quarter.

“We’re obviously disappointed with the revenue,” said Mr Davis. “But we have delivered profits slightly ahead of expectations and cash is significantly ahead. What we do need is customers that have the confidence to start increasing their spend.”

Pre-tax profit fell to £33.2m, from £38.7m a year ago, generating earnings per share of 0.9p (2.8p). Cash from operations was £335.2m, down 17.4 per cent, and there was no dividend.

Net debt was £2.88bn at September 30, or 4.9 times adjusted earnings before interest, tax, depreciation and amortisation, compared with £3.1bn in March.

Paul Richards, analyst at Numis, said he considered Yell a “high-risk, speculative investment” given the combination of structural, cyclical and balance sheet pressures.

Merrill Lynch, one of Yell’s brokers, downgraded its forecasts and said the group’s debt was “firmly back in focus in the form of covenant risk”.

“Our new numbers imply the group could hit its covenant in [the full year to] 2013, suggesting a reset may be necessary at some point,” the broker said. Covenant headroom at September 30 was 29 per cent.

Mr Davis said: “It’s possible that over time the headroom will tighten, but at the moment we’re comfortably supporting our debt.

“Our revenue run rate is not where we expected to be and the economy needs to recover in the next couple of years – otherwise a discussion will have to be had. But we’re a long way off that.”

The shares fell 3.19p to 12.37p.

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