YPG Damage Limited
Here is a quick follow-up on the fallout from the Nov. 1 announcement that the Canadian government will tax income trust dividends. Income trusts had become a popular structure in Canada, and one of the leading trusts is the Yellow Pages Income Fund, operator of Yellow Pages Group, Canada’s leading directory publisher. The government’s decision was driven by concerns over lost tax revenues, as the funds distribute all their free cash as tax-free dividends to unitholders.
After taking an 18.9 percent dive on the wake of the news, YPG has gained back a fraction of its unit price. The Yellow Pages Income Fund closed at C$15.12 on Oct. 31, plunged to C$12.26 on Nov. 1 and rose to C$12.60 on Nov. 2. As of midday on Nov. 3, trust units were trading at C$12.79.
A number of banks have issued research notes on YPG, many expressing the view that this will be a solid blow to the fund but that the underlying business is sound.
Ben Mogil at Westwind Partners reiterated a “buy” rating in his note yesterday. Mogil noted the decision left YPG exposed to heavy taxation because it has very few hard assets on its balance sheet. Mogil believes the main fallout will be that YPG will be curtailed in its acquisition ambitions, including the possible acquisition of Aliant Actimedia, in which YPG is a joint-venture partner with Bell Aliant.
Not all agree. According to a Bloomberg report, Merrill Lynch Canada analyst Joel Sutherland downgraded Yellow Pages to “sell” from “buy.”
Westwind’s Mogil pointed out in his note that the government decision put the brakes on some planned trust conversions, notably Telus and BCE. This leaves YPG as the “benchmark of business trusts,” he writes. “This should help create continued investor interest.”
Also weighing in to maintain a buy rating was UBS, where its analyst Eric Mencke points to expectations that YPG will continue to throw off a lot of free cash. Still, he adjusted his target price downward to C$14.00 from C$18.00.
Mogil also reduced his target price from C$19.00 to C$15.50.
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I was recently corrected by Joel Sutherland. His downgrade was from "Buy" to "Neutral," not "Sell." A downgrade nonetheless, but not as severe. My bad, as they say.