Toll Holdings (TOL) News Update

Toll Holdings (TOL) has a share price target of $8.60 from Australian market analyst UBS.

Toll Holdings (TOL) Discount to fair value likely to continue

Earnings changes for Virgin Blue:

We are cutting our Toll EPS forecasts by 14% in FY09 to reflect our separately published Virgin Blue downgrades. Our transport earnings remain unchanged, although risk is probably to the downside given expectations for slowing economic growth and an inevitable lag inpassing through fuel cost rises.

We see three key share price drivers::

1) Earnings (and capital) drain from Virgin Blue - earnings volatility is likely to continue, but our base case forecasts do not see the need for an equity injection. 2) Exposure to macro factors - we estimate only 40% of Toll's transport earnings are materially impacted by a slowing in the Australasian economy, and we believe there are factors such as improved industry structure that will mitigate the impact. 3) Acquisition capacity and strategy - we estimate Toll has at least A$1.2bn of debt capacity, but justifying its offshore strategy remains a key issue.

Stock looks good value, but negative sentiment likely to continue:

Toll looks good value on our forecasts, with the transport businesses being valued on a P/E of 12x, versus global comps on 16x, and the Australian Industrials on 14x. However, the group P/E (including Virgin Blue) is on 14x, and ongoing concern regarding the above issues means the stock is likely to stay at a discount.

Valuation A$9.40 / Price target A$8.60

Following our earnings changes, our SOTP valuation drops to A$9.40 (was A$10.50) and includes 80c per Virgin Blue share. Our new price target of A$8.60 reflects no value for Virgin Blue, and 15x FY09E transport EPS.