Valuecruncher places a mid-point valuation of $1.22 per share on Singapore Yellow Pages with a sensitivity range of $1.16 to $1.28 per share. The mid-point valuation is consistent with the current share price of $1.21.

The Valuecruncher valuation implies a forecast EV/EBITDA multiple of 12.6 compared with the current market multiple of 12.5. The Yell Group PLC which operates directory services in a number of countries including the UK and USA is currently trading at a forecast EV/EBITDA multiple of 9.5. The Yell Group experienced a 20% drop in it’s share price in April 2007 after “revising” earnings estimates for their U.S. operations. The New Zealand Yellow Pages business was recently purchased by a private equity consortium for a forecast EV/EBITDA multiple of approximately 13.

Valuecruncher has forecast relatively stable EBIT margins of approximately 35% with short-term revenue growth of 5.7%. Valuecruncher has used a cost of capital of 10% and a long-term growth rate of 2.5%.

Valuecruncher Valuation Report - Singapore Yellow Pages

Valuecruncher has placed a mid-point valuation of $9.51 per share on Michael Hill International (MHI) with a sensitivity range of $8.78 to $10.26. This valuation is materially lower than the current market price of $11.44. The current price of $11.44 is at the top end of the 12-month trading range of $6.61 to $11.50. MHI is a very thinly traded stock with over 90% of the shares outstanding held by institutions or insiders. The last significant transaction was a share buyback on 17 August 2007 when the company purchased 246,405 shares at a price of $9.50. The price this buyback occurred at is consistent with the Valuecruncher mid-point valuation.

Michael Hill Operations

Michael Hill International operates 192 jewellery stores in Australia (126), Canada (16) and New Zealand (50) with plans to open another 78 stores over the next three years. The majority of these new stores will be Australia (36) and Canada (36).

MHI grew revenues ($348.8 million) and EBIT (35.1 million) by 13.8% and 44.1% respectively in the 2007 financial year. The significant increase in EBIT reflects a relatively flat operating performance in 2006. 

New Zealand stores exhibit the strongest operating metrics with same store sales growth of 4.6% and EBIT margins of 13.9%.

Australian operations had same store growth of 3.4% and EBIT margins of 9.2%.

Canadian operations are still in their relatively early stages with 4 stores opened in the 2007 FY and revenues increasing 60% to $25 million. Canadian stores experienced same store growth of 2.9% with EBIT margins slightly below break-even.

Valuecruncher Valuation Assumptions

Valuecruncher has assumed annualised revenue growth of 14.1% over the next three years driven by the projected new stores. EBIT margins are forecast to fall slightly to 9.6% by 2010 reflecting the lower operating margins currently being achieved in Australia.

Valuecruncher has used a cost of capital of 11%, this is significantly higher than the 8% used in Valuecruncher’s previous valuation of MHI. The cost of capital of 11% reflects the uncertainty surrounding the planned international growth, particularly in Canada. 

Valuecruncher has assumed a long-term growth rate of 3.5%.

A key factor in MHI’s valuation is the projected EBIT margins. Canadian stores currently represent 7% of the company’s revenues and are at break-even at the EBIT line. Based on management’s projections in 3 years there will be as many stores in Canada as there will be in New Zealand. The operating margins achieved in Canada will have a significant impact on value.   

Valuecruncher Valuation Report - Michael Hill International - 20070924

Updated: Checkout the Valuecruncher Valuation model used and enter your own assumptions-  Valuecruncher Valuation Model – YouTube

Google has recently announced plans to introduce a new overlay styled advertising model for YouTube. The model involves overlaying a semi-transparent ad across the bottom 20% of the video. The overlay appears after 15 seconds of the video and last for 10 seconds with viewers having the option to click on the ad. The overlay model is the result of trials of various advertising formats that included pre-rolls.

The initial release will involve overlay advertising on videos provided by YouTube’s content partners. The advertising revenue will be shared with content partners using a similar model to the Google Adsense network.

This announcement is significant in that it represents the first attempt by Google to monetize their $1.65 billion acquisition of YouTube beyond traditional text and banner advertising. Google acquired YouTube nearly 12 months ago and it has yet to generate significant revenues:

Revenues realized through the Google Print Ads Program, Google Audio Ads, Google Video, Google TV Ads, Google Checkout and YouTube were not material in any of the periods presented. Google 10-Q, 30 June 2007

In a wider context-how the overlay framework will be received will be significant for online video in general, until now revenue models involving pre-roll advertising have not been well received by viewers.

The announcement of the overlay framework has generated a range of analysis including a number of posts on Silicon Alley Insider (SAI) estimating the potential revenue YouTube could generate from in-video advertising.

SAI Analysis:
Economics of Online Video 1
Economics of Online Video 2
Analyzing YouTube’s Revenue Potential

SAI’s analysis includes estimates of YouTube’s operating expenses.

Valuecruncher has built a high-level valuation model for YouTube incorporating the SAI analysis of the overlay revenue model, Valuecruncher’s analysis of the opportunity and a range of other online sources. The valuation model is designed to value YouTube as an independent entity with revenues coming from both in-video advertising and traditional online advertising (Adsense and banners).

Key Assumptions

Videos Streamed
The total number of videos streamed is important for estimating the costs associated with operating the YouTube. These costs include streaming and storage. Based on ComScore data United States viewers watched 2.4 billion videos at YouTube in July 2007. In August 2006 the United States accounted for approximately 22% of all YouTube’s streaming activity. Valuecruncher has assumed an average of 15 billion videos will be streamed worldwide per month in 2008 increasing to 50 billion per month in 2012. This is an aggressive growth rate that is very subjective. Valuecruncher believes that based on YouTube’s current audience and the projected increase in time spent online this growth is achievable. If YouTube can establish a sustainable revenue model for online video combined with its audience dominance it will become the default online distribution channel for content providers.

Percentage Monetized
YouTube is implementing the overlay ads on videos provided by content partners. The percentage monetized represents the portion of YouTube’s video servings that will contain advertising. Valuecruncher has utilized SAI estimate that 30% of YouTube’s servings will be monetized. Google does not disclose what portion of YouTube’s inventory content partners supply and it is uncertain what percentage of “individual” generated content would be monetized.

Content Royalty ‘
The content royalty represents the percentage of the advertising revenue that is distributed to content providers. This model is similar to the Adsense framework. We have estimated that 60% of the advertising revenue will be passed onto content providers. This is lower than the estimated 85% paid out in the Adsense framework. The lower content royalty reflects the higher costs associated with delivering the video content.

CPM Rate
The CPM rate reflects the price paid by advertisers per 1,000 overlays. Valuecruncher has used an estimated CPM rate of $20.

Storage & Streaming Expenses
Valuecruncher utilizes the SAI’s analysis and assumes storage and streaming expenses of $1.20 per 1,000 videos streamed. These expenses are expected to drop to $0.23 per 1,000 videos streamed by 2012. The assumed decline in delivery costs is based on streaming costs falling at a greater rate than video file sizes increase.

Sales, General and Administration (SG&A) Expenses
SG&A expenses are estimated at 15% of revenues based on Google’s SG&A.

Research and Development (R&D)
YouTube’s R&D is estimated at 10% of revenues and is expensed not capitalized.

Supplementary Revenues
Valuecruncher assumes that YouTube will be able to generate additional revenues via Adsense and banners. Valuecruncher has assumed a CPM rate of $0.75 and for simplicity has applied this to the total number of videos streamed.

Cost of Capital
Valuecruncher uses a cost of capital of 15% for YouTube, this is higher than the 12% used by analysts for Google. Valuecruncher believes the uncertainty surrounding the acceptance of the overlay intrusion and CPM rates advertisers will pay justifies the higher cost of capital.

Long-term Growth
Valuecruncher has used a long-term growth rate of 7%, this growth rate represents the potential of online video beyond the 2012.

YouTube Valuation
Based on the assumptions above Valuecruncher estimates the enterprise value of YouTube at $4.91 billion (this point estimate is very sensitive to a number of subjective assumptions and Valuecruncher encourages readers to interrogate the valuation by adjusting some of the assumptions – Valuecruncher Valuation Model – YouTube). This represents $15.73 per share for Google shareholders or 3.0% of Google’s value (based on a share price of $522.65). Google is currently trading at an EV/EBITDA multiple of 29.14. The YouTube valuation implies an EV/EBITDA multiple of 52.77 based 2008 EBITDA, this is relatively high multiple reflects the significant growth expected over the next 5 years. Based on analysts forecasts for Google and Valuecruncher’s projections YouTube will represent 9.3 % of Google’s revenues ($3.65 billion of $39 billion) and 3.4% of Googles EBITDA ($645 million of $19 billion) in 2011. Google’s current EBITDA margins are approximately 38% driven by Google Adwords. The delivery costs and revenue sharing of associated with online video content contribute to significantly lower EBITDA margins for YouTube (24% in 2012 in Valuecruncher’s financial projections).

Based on Valuecruncher’s projections YouTube’s ad overlay revenues would represent approximately 4.4 % of online advertising (based of PwC estimates) and approximately 32% of online video advertising in 2011.


This valuation involves a number of very subjective assumptions and considerable uncertainty.
Key issues include:

• Viewer response to the overlay advertising; will they reject the intrusion and exit the videos?
  
• How viewers respond will be crucial to determining what CPM rates advertisers are willing to pay.
  
• What percentage of videos advertisers will be prepared to advertise in?
  
• How will YouTube match advertisers with content and visitors?
  
• Although the overlay model has been trialed it is still unproved with a mass audience. Other revenue models may emerge including a cost per click framework in place of or in conjunction with the CPM framework that could have a significant impact on YouTube’s valuation.
  
• YouTube’s potential margins are dramatically reduced by monetized content subsidizing the cost of delivering “non-commercial” content.
  
• Will YouTube continue to dominate the online video space or will competitors that focus on a purely “premium” content (i.e not have the cost cost of serving non-monetizable content) develop a superior business model?
  

In the online world there are two key metrics; eyeballs and content and these two metrics are very highly correlated. At the moment YouTube dominate both of these categories but it will be interesting to observe how this changes as more “premium content” moves online. Will YouTube become the online broadcaster of choice for content providers?

A key issue that this valuation reiterates is that “content is king”. A significant portion of the projected growth in the online advertising spend will be realized by content providers not the distribution channels. This is the model that businesses such as WatchMojo are looking to capitalize on.

Did YouTube’s founders miss out when they sold for $1.65 billion?
YouTube has grown significantly since the Google acquisition in October 2006. At the time of acquisition YouTube was at best operating at breakeven, facing legal action and had no sustainable business model in place. The Valuecruncher valuation may underestimate the uncertainty surrounding the advertising potential but based on the uncertainty that existed at the time of the acquisition and the costs associated with scaling YouTube to the size it is today the acquisition price of $1.65 billion is still a great result for the YouTube founders.

Valuecruncher places a mid-point valuation of $1.04 per share with a sensitivity range of $0.90 to $1.19 per share for Restaurant Brands (RBD). This is considerably higher than the current market price of $0.84. RBD has traded consistently below $1.00 since late March 2007 following CEO Vicki Salmon’s resignation. Six months later the position is yet to be filled.

RBD Summary

RBD is effectively a management company, they operate 236 concept stores (at 21 May 2007) under the KFC (87), Pizza Hut (103) and Starbucks (46) brands throughout New Zealand. RBD pays license and royalty fees to Yum! Brands (KFC and Pizza Hut) and Starbucks Corp for the right to operate the brands in New Zealand. RBD is in the process of exiting their Pizza Hut operations in Victoria, Australia.

KFC

The KFC brand generates approximately 62% of RBD’s revenues ($182.7 million) and has been the primary driver of RBD’s growth with 7.1% growth in same store sales in the 2007 financial year. The growth in KFC sales has been driven by a revised menu and refurbishment of approximately 21 stores. The refurbishment of the KFC stores is a key driver of RBD’s capital expenditure and is expected to continue over the next financial year. KFC generates the highest EBITDA margins (17.1% before general and administrative expenses) of the three RBD concepts.

Starbucks

Starbucks stores represent the smallest portion of RBD’s operations providing 11% ($31.3 million) of New Zealand revenues in the 2007 financial year. Starbucks revenues are grew 12.2% with 3 new stores added in the 2007 financial year, with same store revenues growing at 3.2%. In the 2007 financial year Starbucks generated $3.6 million EBITDA before general and administrative expenses.

Pizza Hut

Pizza Hut represents approximately 27% ($79.7 million) of RBD’s revenue. The Pizza Hut segment has experienced declining revenues and EBITDA over the last 2 years. RBD have undertaken a review of the Pizza Hut operations and are in the process of implementing a new strategy. The new strategy includes closing 15 “Red Roof” dine-in stores to focus on takeout and delivery stores and introducing new non-pizza menu items. A key issue facing Pizza Hut operations is staff turnover; in 2007 staff turnover was 77% with management turnover of 40%. The fast-food industry experiences relatively high staff turnover but lowering these levels must be a focus for RBD.

Valuation Assumptions

Valuecruncher’s valuation of $1.04 is based on an annualised revenue growth of 3.4% over the next 3 years. The growth rate reflects the negative growth of the Pizza Hut segment offsetting the recent strong performance of the KFC brand. EBIT margins are forecast to increase to 6.8%, this is consistent with historic levels. Valuecruncher has applied a terminal growth rate of 2.5%. Valuecruncher has used a cost of capital of 12% to RBD, this is higher than the 11.1% listed in the latest PWC Cost of Capital report reflecting the uncertainty surrounding the Pizza Hut operations.

Conclusion

The Valuecruncher valuation is considerably higher than the recent trading range of RBD. The Valuecruncher valuation assumes that the restructuring of the Pizza Hut operations is successful. The key uncertainty facing RBD is how they will address the issues with their Pizza Hut division; they have exited their Australian operations and are restructuring the New Zealand operations. The inability to turn around the Pizza Hut operations will have a negative value impact. The recent performance of the KFC brand and in particular the refurbished stores has been strong it is important to consider that this growth is being driven by significant capital expenditure. RBD’s priority should be to appoint a CEO and executing the results of the strategic review.

The RBD business model has a number of fundamental issues:

1. As a management company they are required to pay a license and royalty fees for the right to do business. The royalty fees are typically based on revenues so RBD are required to pay royalties on loss making operations. The license fees are a function of stores operated so these costs are not mitigated by scale.
2. The quick-service take-out restaurant industry is extremely competitive, particularly the pizza sector. Pizza Hut is constantly competing on price for market share. RBD is paying royalties to operate a brand that is producing a product that can be regarded as a commodity. Pizza Hut is competing directly with Domino’s at the low cost end of the market and indirectly with all other quick-service take-out providers.
3. Increases in the minimum wage and the pressure to abolish youth rates will impact on RBD’s profitability.
4. The quick-service take-out restaurant industry is under pressure to address the health/obesity issues associated with their products.

Valuecruncher Valuation Report - Restaurant Brands - 20070905