Toll Holdings Limited (TOLL) Update

Submitted by Jim Thesiger on 7 May, 2008 - 16:05

The Toll Holdings Limited (TOLL) current share price has a implied reduction in domestic growth from 7% to 3% with margin decline too aggressive from Australian stockmarket analysts from Citi.

Toll Holdings Ltd: Rationalising Risk

Upgrade to BUY — Sale of NZ rail and ferry assets removes an element of risk and switches focus back to domestic ops. Current share price implies a reduction in domestic growth from 7% to 3% with margin decline which looks too aggressive in our view. We have not changed our forecasts at this stage.

Valuation Attractive — Toll is currently trading on a prospective PE of 12.5x or a 12% discount to the ASX-100. This is one of the lowest PE rels Toll has traded on in the last six years. The swing factor to close the value gap will be the rate of decline in the domestic business. The debate is about how severe the slow down will be rather than will it slow.

Sale of NZ Assets — NZ Govt has purchased Toll's NZ Rail and Ferry assets for NZ$665m which implies Toll NZ EV of A$737m. This is a better than expected outcome and compares to consensus valuations of A$700m - A$800m. The transaction is marginally eps accretive.

Focus Unchanged — Management commentary remains bullish around Australian trading conditions, contrary to market expectations and suggests FY08e result could prove a catalyst for re-rating. Asian growth story, however, will take time to bear fruit at an EPS level.