by Sergiu Lisnic, CFA
slisnic@spelmanresearch.com
September 28, 2004
Yak Communications: NASDAQ “YAKC”
Maintain at Strong Buy
Price Target: 12 months $14.15
Share Statistics Summary Financials 2003A 2004A 2005E
Symbol YAKC Revenues (FYE 6/30) $40.4M $80.8M $105.6M
Current Price $7.70 Gross Profit 15.0 27.7 35.9
High/Low 52 Weeks $21.70-$5.50 Net Income 3.5 5.6 8.1
Average Daily Volume 170K Assets 31.6 50.9 60.3
Market Capitalization 99.28M Long-term debt 10.0 1.4 0.9
Shares Outstanding 12.9M Shareholders Equity 5.7 28.0 36.3
FY05E EPS (diluted) $0.60 Total Liabilities/Assets 82% 45% 40%
P/E FY05 (FYE 6/30) 12.8x EPS (dilluted) $0.29 0.49 0.61
Dividends 9/25/04 ROE 61% 20% 22%
Source: Yahoo! Finance
We are reiterating our strong buy rating on YAKC following the release of 10-K for FY04
ended 6/30/2004. Aside from updating the financial model with detailed segment data we
also want to comment on the short-term US initatives and the long-term VoIP strategy of the
company detailed in the 10-K report.
YAK has announced in the past that is plans to re-enter the US market. So far, it was addressing the issue in
non-specific phrases, suggesting potential acquisitions. The 10-K report talks about specific steps that have
been taken to address the huge and complicated US telecom market. The company stated that it plans to
launch its 1+ service in the US during Q1FY05 (fall on 2004). Customers billing will be done with the help of a
company called Billing Concepts, Inc. which will provide for inter-carrier clearinghouse operations, for
handling, transporting and delivery of YAK billing records to the LEC for invoicing and collection purposes
Yak’s announced that its network has been expanded into the US by loading CIC access codes in all mainland
48 states. US customers can reach this network by dialing the appropriate 1010YAK CIC code or signing up to
Yak’s “1+” program. US originated calls are hauled to YAK switch in Toronto and terminated on the Canadian
network or routed “off net” if the calls terminate outside of Canada. Further, redundancy has been built into
the US network by connecting two separate routes through major switching centers in New York City. YAK has
also augmented its network infrastructure to facilitate the launch of our WorldCity™ VOIP product, a next
generation voice communication service.
The company has also sketched its strategy for the Canadian market. As its leadership position on the
residential market poses difficulties for further in this segment, the company is looking into new ways to
increase revenues. SMEs are the next target of YAK in Canada. YAK has also taken measures to increase
efficiencies of its Canadian operations, including owned private leased line network throughout all major
Canadian provinces and a Class 4/5 SanteraOne softswitch and Media Gateway. The Santera switch is currently
using approximately 20,000 ports, has 40,000 ports and can be expanded to 200,000 ports.
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The greatest concern of telecom companies today – the rise of VoIP – that could reduce traditional telecom
companies to non-existence in 10 years’ time has also been addressed by management in the recent 10-K. The
company recognizes the strategic importance of this segment and takes a hands-on approach, offering the
service early in the game. In time, as customers become aware of the advantages of the VoIP services, they may
choose to stay with YAK for the new service instead of migrating to other providers. YAK will benefit in two
ways – first, it will not have to “guess the moment” when VoIP reaches critical mass and traditional telephony
gives way to VoIP. Secondly, YAK can benefit from traditional telephony service revenues while they last, and
at the same time to ride the wave of VoIP as it grows. So in a way YAK can avoid the start-up losses of early
entrants into the VoIP markets and also move away from the traditional telephony business that is bound to
wither. Naturally, YAK will have an advantage in addressing potential VoIP customers because it already has a
relationship with many of them and can capitalize on its brand name.
From a financial point of view, we would like to stress the increasing cash-flow generating ability of the
company – FY04 operating cash flows surged to $12 million up from $7 million during FY03. The company has
ended its fiscal year with a cash balance of $22.1 million or 43.5% of total assets. That means that the equity
raised during FY04 has provided the company with the cash to support both its US and VoIP development
initiative as well as to make strategic acquisitions.
Going forward we have taken into account higher expenses for FY05 as a result of the planned deployment of
US operations that will involve larger marketing and promotion expenses and higher salaries and
administrative expenses associated with the establishment of the US office in Aventura, Florida. Additionally,
the roll-out of the “WorldCity™ VoIP” initiative to residential customers and planned broadband and VoIP to
SME customers is likely to decrease margins in the first year of operations. As a result, we are forecasting a
healthy 31% increase in revenues in FY05 and an increase of net income of 33.5% during the same period.
Growth in sales in our view will outpace the growth in expenses. Starting with FY06, strategic decisions taken
today will start to gain momentum and EPS is expected to reach $0.76 up from expected $0.61 in FY05 and
actual $0.49 in FY04.
Of course, expected positive developments for the company also involve risks. The telecommunications
industry is intensely competitive with an increasing number of players and fierce price competition. YAK
competitive advantages so far have been in the ethnic markets on the territory of Canada. Its future plans
involve deploying operations in the US, in the SME markets and expansion into broadband/ VoIP. There is a
risk that YAK successful performance up-to-date will not be replicated in these new geographic and strategic
markets. We believe, based on the recent 10-K report, that management has good understanding of the
challenges ahead and it has come up with a sound strategy to address these challenges. Therefore, we find
recent financial performance of YAK as representative of future success and believe that management can make
a difference and create a successful cross-border telecom provider.
Target Price Calculation
Based on a PE multiple calculation we estimate that the company will be trading in twelve month at:
$0.61 EPS FY05 x 20 PE multiple = $12.20 target
Based on an EBITDA calculation:
$15.55M EBITDA FY05 x 12 EBITDA multiple = $186.6M EV => $14.28 target
Based on a Price-to-Sales Ratio:
$104.8M Sales FY05 x 2.0 PS ratio = $209.6M MV => $16.12 target
An equal-weight average for the three methodologies produces a twelve-moth price target of $14.20.
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This price target is almost a two-times increase from the current price level. We see the recent fall in the price
of stock as unwarranted by current company developments and expect the price of the stock to rebound,
therefore we reiterate our strong buy rating.
Share Price Performance
Source: http://finance.yahoo.com/q/bc?s=YAKC&t=1y
Sergiu Lisnic, CFA worked as an analyst for Evanston Capital Advisors for a year and a half, and subsequently served for
two years as a financial analyst with a gas distribution and a FMCG company. He was primarily responsible for financial
statement analysis, budgeting and reporting to shareholders. He earned the CFA title in September 2003.
Spelman Research Associates, ltd, is an independent fee based research, publishing and distribution firm whose contract analyst adhere to the ethics and standards of
the Association for Investment Research Management . The views expressed in this research report reflect the analyst’s personal views about the issuer and its
securities. Opinions and recommendations contained in this report are submitted solely for advisory and information purposes and are not intended as an offering or a
solicitation to buy or sell the securities mentioned above. The analysts are responsible only to the public and this report is not a service to the company. We received a
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Earnings Model
Yak Communications
Earnings Model 9/30/04 12/31/04 3/31/05 6/30/05 6/30/04 6/30/05 6/30/06
US$000 1Q05E* 2Q05E 3Q05E 4Q05E FY04 A FY05E 2006E
Total Revenue 24,010 25,340 26,980 29,327 80,803 105,656 134,151
Cost of Service 15,846 16,724 17,807 19,356 53,130 69,733 89,881
Gross Profit 8,163 8,615 9,173 9,971 27,672 35,923 44,270
Selling 960 1,394 1,619 1,466 3,894 5,439 8,049
General & Administrative 3,385 3,598 3,777 4,018 11,220 14,779 16,769
Organizational and Startup Costs 40 40 35 35 261 150 0
EBITDA 3,778 3,584 3,742 4,452 12,297 15,555 19,452
Depreciation/Amortization 816 836 863 909 3,002 3,425 4,025
EBIT 2,961 2,747 2,879 3,543 9,295 12,130 15,427
Operating Margin 12.3% 10.8% 10.7% 12.1% 11.5% 11.5% 11.5%
Interest Expense (Income), net 75 75 75 75 460 300 250
Accounts Receivable Financing 75 75 75 75 514 300 200
Share of Net Loss of Affiliate (25) (25) (25) (25) (39) (100) (100)
Income Earned from Jt. Marketing Agreement (150) (150) (150) (150) (614) (600) (600)
Pretax Income 2,986 2,772 2,904 3,568 8,975 12,230 15,677
Pretax Margin 12.4% 10.9% 10.8% 12.2% 11.1% 11.6% 11.7%
Income Tax (Benefit) 1,015 943 987 1,213 2,931 4,158 5,330
Net for Common 1,971 1,830 1,917 2,355 6,044 8,072 10,347
EPS - Diluted $0.15 $0.14 $0.14 $0.18 $0.49 $0.61 $0.76
Source: Company Filings, Analyst Estimates
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Comparative Operating Statistics
For the Year Ended June 30, 2004
Products Revenue Customers Minutes Calls Min/ Call Min/ Cust Rev/ Min Rev Incr YOY
Dial-Around/1+ $54,202,721 717,867 856,541,950 75,149,841 11.40 1,193 $0.063 41%
LooneyCall $8,953,375 92,161 108,254,915 7,723,453 14.02 1,175 $0.083 342%
Yakcell $86,597 956 819,440 126,643 6.47 857 $0.106 2011%
TOTAL $63,242,693 810,984 965,616,305 82,999,937 11.63 1,191 $0.065 57%
Increase YOY 56.5% 30.2% 77.8% 36.1%
For the Year Ended June 30, 2003
Products Revenue Customers Minutes Calls Min/ Call Min/ Cust Rev/ Min Rev Incr YOY
Dial-Around/1+ $38,375,404 553,137 514,024,773 58,949,188 8.72 929 $0.075 57%
LooneyCall $2,024,619 69,370 29,082,306 2,021,433 14.39 419 $0.070 -
Yakcell $4,103 205 38,754 5,383 7.20 189 $0.106 -
TOTAL $40,404,126 622,712 543,145,833 60,976,004 8.91 872 $0.074 65%
Increase YOY 65.0% 119.8% 94.1% 74.7%
For the Year Ended June 30, 2002
Products Revenue Customers Minutes Calls Min/ Call Min/ Cust Rev/ Min
Dial-Around/1+ $24,491,956 283,370 279,857,456 34,910,408 8.02 988 $0.09
LooneyCall — — — - - -
Yakcell — — — - - -
TOTAL $24,491,956 283,370 279,857,456 34,910,408 8.02 988 $0.09
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