Toll Holdings (TOL) Company Stock Update

Submitted by Jim Thesiger on 16 June, 2008 - 18:24

Toll Holdings (TOL) has a $8.00 share price target from Australian stock analyst Macquarie Research Equities.

Toll Holdings Ltd (TOL): No Parachute Required

VBA look no strings — VBA Management has confirmed current plans for FY09 involve no parental nor external funding based on jet fuel US$160bbl (CIR $167). We assume no funding is provided by TOLL at any stage for VBA.

EPS downgrade +20% — The 16% appreciation in the oil price since VBA management lowered guidance in April, combined with reduced capacity, increased ticket pricing and aggressive cost cutting, sees our VBA NPAT fall to -$18m and $12m in FY09e and FY10e, respectively. Consequently, our TOLL EPS forecasts are downgraded by 25% and 24%, respectively.

Economic slowdown — We expect TOLL domestic revenue growth will fall to 5.6% in FY09e (cf 8% in FY08e) reflecting an economic slowdown. We think the share price is implying growth slows to ~1%, which appears overly pessimistic.

Valuation implications — Despite an estimated replacement cost of $1.00 per share, we ascribe $0.51 per share value to VBA in our SOTP. Our new $8.00 target price for TOL is based of a SOTP of $8.22 and a PE valuation of $7.75 based on a 5% discount to the FY09E market P/E of 14.9x (ASX 200 ex Fin/REITS). We are taking a mid-cycle/longer-term view in our valuation.

Negative news flow — Weaker economic indicators in Australia, combined with softening container volume growth in Asia (refer China Ports: May Container Throughput Growth Deteriorated Sharply, Ally Ma), imply the stock may come under pressure in short term ahead of the AGM and 1H09 results. We would look to accumulate on weakness.

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