by Sergiu Lisnic, CFA slisnic@spelmanresearch.com September 28, 2004
Yak Communications: NASDAQ “YAKC”
Maintain at Strong Buy Price Target: 12 months $14.15
Summary Financials YAKC $7.70 $21.70-$5.50 170K 99.28M 12.9M $0.60 12.8x 9/25/04 Revenues (FYE 6/30) Gross Profit Net Income Assets Long-term debt Shareholders Equity Total Liabilities/Assets EPS (dilluted) ROE Share Statistics Symbol Current Price High/Low 52 Weeks Average Daily Volume Market Capitalization Shares Outstanding FY05E EPS (diluted) P/E FY05 (FYE 6/30) Dividends
Source: Yahoo! Finance
2003A $40.4M 15.0 3.5 31.6 10.0 5.7 82% $0.29 61%
2004A $80.8M 27.7 5.6 50.9 1.4 28.0 45% 0.49 20%
2005E $105.6M 35.9 8.1 60.3 0.9 36.3 40% 0.61 22%
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 fee of $15,500 from the company for one year’s coverage. We do not inform any company in advance of the nature or conclusions of our analysts’ reports in advance of paying the fee nor can a company withdraw from coverage before the expiration of the one year term. Neither the Analysts nor the company own equity or debt securities of the companies on which our contract analysts report. More information about Spelman Research ‘s policies are available at www.spelmanresearch.com. Spelman Research Associates, Ltd., 545 Madison Avenue ,Suite 200, New York City, NY 10022 Phone: (212) 838 5520 Fax: (212) 838 22 13 Web: www.spelmanresearch.com Email: info@spelmanresearch.com
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Earnings Model Yak Communications Earnings Model US$000 Total Revenue Cost of Service Gross Profit Selling General & Administrative Organizational and Startup Costs EBITDA Depreciation/Amortization EBIT Operating Margin Interest Expense (Income), net Accounts Receivable Financing Share of Net Loss of Affiliate Income Earned from Jt. Marketing Agreement Pretax Income Pretax Margin Income Tax (Benefit) Net for Common EPS - Diluted
Source: Company Filings, Analyst Estimates
9/30/04 1Q05E* 24,010 15,846 8,163 960 3,385 40 3,778 816 2,961 12.3% 75 75 (25) (150) 2,986 12.4% 1,015 1,971 $0.15
12/31/04 2Q05E 25,340 16,724 8,615 1,394 3,598 40 3,584 836 2,747 10.8% 75 75 (25) (150) 2,772 10.9% 943 1,830 $0.14
3/31/05 3Q05E 26,980 17,807 9,173 1,619 3,777 35 3,742 863 2,879 10.7% 75 75 (25) (150) 2,904 10.8% 987 1,917 $0.14
6/30/05 4Q05E 29,327 19,356 9,971 1,466 4,018 35 4,452 909 3,543 12.1% 75 75 (25) (150) 3,568 12.2% 1,213 2,355 $0.18
6/30/04 FY04 A 80,803 53,130 27,672 3,894 11,220 261 12,297 3,002 9,295 11.5% 460 514 (39) (614) 8,975 11.1% 2,931 6,044 $0.49
6/30/05 FY05E 105,656 69,733 35,923 5,439 14,779 150 15,555 3,425 12,130 11.5% 300 300 (100) (600) 12,230 11.6% 4,158 8,072 $0.61
6/30/06 2006E 134,151 89,881 44,270 8,049 16,769 0 19,452 4,025 15,427 11.5% 250 200 (100) (600) 15,677 11.7% 5,330 10,347 $0.76
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Comparative Operating Statistics
For the Year Ended June 30, 2004 Products Revenue Dial-Around/1+ $54,202,721 LooneyCall $8,953,375 Yakcell $86,597 TOTAL $63,242,693 Increase YOY 56.5% For the Year Ended June 30, 2003 Products Revenue Dial-Around/1+ $38,375,404 LooneyCall $2,024,619 Yakcell $4,103 TOTAL $40,404,126 Increase YOY 65.0% Customers 717,867 92,161 956 810,984 30.2% Minutes 856,541,950 108,254,915 819,440 965,616,305 77.8% Calls 75,149,841 7,723,453 126,643 82,999,937 36.1% Min/ Call 11.40 14.02 6.47 11.63 Min/ Cust 1,193 1,175 857 1,191 Rev/ Min $0.063 $0.083 $0.106 $0.065 Rev Incr YOY 41% 342% 2011% 57%
Customers 553,137 69,370 205 622,712 119.8%
Minutes 514,024,773 29,082,306 38,754 543,145,833 94.1%
Calls 58,949,188 2,021,433 5,383 60,976,004 74.7%
Min/ Call 8.72 14.39 7.20 8.91
Min/ Cust 929 419 189 872
Rev/ Min $0.075 $0.070 $0.106 $0.074
Rev Incr YOY 57% 65%
For the Year Ended June 30, 2002 Products Revenue Customers Dial-Around/1+ $24,491,956 283,370 LooneyCall — — Yakcell — — TOTAL $24,491,956 283,370
Minutes 279,857,456 — — 279,857,456
Calls 34,910,408
34,910,408
Min/ Call 8.02 8.02
Min/ Cust 988 988
Rev/ Min $0.09 $0.09
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