Interesting report!

Have to change my tack on Toll and start buying!

* Patrick has rallied strongly over the last couple days following its surprise inclusion into the MSCI at the end of this month.
* Indeed over the last 10 days Patrick's share price has risen 13.5% from $14.80 to $16.80. By comparison Toll's share price has risen only 6.5% during the same period ($30.50 to $32.50). Toll is up 10% over the last month.
* Patrick is now trading at 18x FY03E v Toll's 21x FY03E.
* We believe Toll should trade at, at least a 20% premium to Patrick given:
1. 20% of Patrick's EBIT is generated from a high risk airline. We are concerned that Patrick would like to own 100% of Virgin Blue and is not just being an opportunistic asset trader (or so it appears).
2. Patrick has significant acquisition risk in our view (Could spend up to $1bn on new assets and a 4th core business stream).
3. Less management depth than Toll.
4. Toll has greater leverage to Pacific National's earnings as the countries largest freight forwarder
5. Our earnings forecasts for Virgin Blue may need to be reviewed if terminal access problems at Sydney airport persist.
6. There is a real risk of a 3rd airline operator starting in Australia within the next 18 months.
7. Toll has a superior EPS growth track record and stronger forecast EPS growth (33% v 21% in FY04E).

* We believe this creates a good short term switching opportunity in the lead up to Toll's FY02 result due out on 5 September 2002.
* We forecast Toll will report 43% EPS growth with NPAT of $75m v $49m pcp. Indeed we expect will generate 30-35% EPS growth over the next couple of years without any further acquisitions.

* Key highlights of the result are likely to be:
1. A strong contribution to NPAT from Pacific National (est $7.2m for the 4 months)
2. Solid EBIT margin growth (up from 4.3% to 5.3%)
3. Very strong cash flow generation
4. Balance sheet strength likely to surprise
5. High quality result overall (higher tax rate, good cash flow reconciliation).
6. We expect the market may have to revise up its estimates closer to our top of market forecasts.

* We retain our BUY rating on both Toll and Patrick, but would much prefer to be overweight Toll leading into the reporting season. Patrick is also likely to bounce on the Toll result, but we expect greater short term upside overall from Toll.
Our current valuation on Toll is $42.23 and $20.32 on Patrick.

P.S. If your name is bomber you will not understand a magnificent company like Toll!!

fergl