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MARKET COMMENT
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Much has been made of Yell's (LSE: YELL) flotation over the last fortnight, and whether it heralds a newfound confidence amongst investors. But what about the company? Are its shares worthy of a nibble? It's certainly a business with many attractive qualities. For the year to March 2003, it made sales of £1.1b and underlying operating profits of £300m. With operating margins coming in at an impressive 27%, we definitely have a solid business franchise on our hands and one that looks worth buying, at the right price. What's more almost all of the company's profits are converted into cash and the nature of the business means revenues are less affected by the ups and downs of the economy (at least that is what the company claims). Incidentially, there is a detailed set of results, with plenty of information on the structure of the business, in the Investor Relations section of Yell's web site. About 55% of sales come from the UK, mainly Yellow Pages of course. However, this part of the business is subject to regulatory price caps. Until the end of 2005, Yell is limited to annual price increases of inflation less 6% (in other words, annual price falls of 3% at the moment). Despite the recent entrance of the likes of BT (LSE: BT.A)(NYSE: BTY), Yell would seem to have very solid position in the UK. The rest of the business is based in the US, where recent acquisitions have made Yell the largest independent provider of classified directory advertising (and the fifth largest overall). Here there are no price restrictions and opportunities for further growth and acquisitions. The current share price of 292p gives the company a valuation of £2.05b. The prospective dividend yield at this level is 3.1%, a bit lower than the market average of 3.5%. Given the lack of available forecasts, getting a P/E is a little complicated. However, we can add the total value of the shares and the company's post-float debt of £1.3b to get an enterprise value of £3.3b. Comparing this to £210m of profits (being operating profits of £300m less 30% tax) implies an historic multiple of 16 times earnings. This doesn't look especially enticing, suggesting investors should keep an eye on the price for a better opportunity.