Huntley's Recommendation: Toll Holdings LimitedRecommendation:...

Huntley's Recommendation: Toll Holdings Limited

Recommendation: Accumulate

TOL is an integrated supplier of transport and logistics services in Australia and NZ and increasingly across the Asia region following several acquisitions. The company has successfully grown via multiple acquisitions. Exceptionally strong cashflow reduced the need for equity. In June 2007 TOL spun out the Patrick port assets and rail company Pacific National to form a separately listed company Asciano, into which it transferred the majority of group debt. Despite a leading position in the Australian market, management still expects to grow revenues organically at twice GDP excluding acquisition growth. This reflects the still relatively low level of logistics outsourcing by some Australian companies. Historically TOL has traded on a high PE multiple and relatively low dividend yield reflecting growth potential.

Event07-May-2009
TOL will buy an initial 40% stake in Indian transport and logistics player BIC Logistics. BIC’s revenue for the year to March 31, 2009 was 1.3bn Indian rupees, around $A37m. TOL has the option of moving to majority over the next two years. TOL will also acquire the remaining 49% of shares in Shenzhen-based ST-Anda Logistics. ST-Anda operates an extensive logistics network across mainland China with warehouses and depots in more than 30 cities; and a distribution network reaching over 1,500 cities across the country.

Business Impact: TOL continued to post underlying organic growth in 1H09, 4% in Australasia and 7.8% in Asia. We understand recent Asian trade activity is down 20%-30%. TOL will be better off due to significant exposure to the relatively resilient Asian oil and gas servicing sector and coal transport. We also expect the company to win share with its significantly increased capacity to service customers in Asia. And management points out that business in all regions continues to outsource a growing proportion of the logistics task. As recently as late April, TOL said there was no change to guidance it issued with the 1H09 results announcement, which was an imprecise: ‘the results of continuing operations…will exceed…the previous corresponding period’. This ought to be the case with TOL’s greatly expanded global forwarding business adding roughly $25m in 2H09 and $20m in 1H09. The key was that there was no suggestion expectations needed downgrading.

Forecast Impact: --

Recommendation Impact: We make no change to our forecasts or recommendation trigger prices.

Event Analysis
TOL will buy an initial 40% stake in Indian transport and logistics player BIC Logistics. BIC’s revenue for the year to March 31, 2009 was 1.3bn Indian rupees, around $A37m. TOL has the option of moving to majority over the next two years. BIC brings scale to TOL’s Indian position. It provides road, rail and air transport across the country, utilising an extensive fleet of modern company owned road vehicles and operating at more than 80 offices and sites. MD Paul Little said: ‘Its strength in Northern India naturally balances our existing business strength in the South and the road, rail and air network leveraged by BIC will enhance our ability to provide total integrated logistics service solutions throughout India’. While BIC’s revenues are still quite small, we expect they will grow solidly as the Indian economy develops. Additionally it is another node in TOL’s Asia Pacific network. TOL is rapidly building a regional capability to attract a wider range of customers, who prefer dealing with one logistics supplier across the region. TOL will also acquire the remaining 49% of shares in Shenzhen-based ST-Anda Logistics. ST-Anda operates an extensive logistics network across mainland China with warehouses and depots in more than 30 cities; and a distribution network reaching over 1,500 cities across the country. MD Paul Little said: ‘Toll Group’s customers in China include some of the largest global FMCG manufacturers such as Colgate, Palmolive and Johnson & Johnson. Complete ownership of this business allows us to better relate to these major customers on a global basis’. TOL continued to post underlying organic growth in 1H09, 4% in Australasia and 7.8% in Asia. We understand recent Asian trade activity is down 20%-30%. TOL will be better off due to significant exposure to the relatively resilient Asian oil and gas servicing sector and coal transport. We also expect the company to win share with its significantly increased capacity to service customers in Asia. And management points out that business in all regions continues to outsource a growing proportion of the logistics task. As recently as late April, TOL said there was no change to guidance it issued with the 1H09 results announcement, which was an imprecise: ‘the results of continuing operations…will exceed…the previous corresponding period’. This ought to be the case with TOL’s greatly expanded global forwarding business adding roughly $25m in 2H09 and $20m in 1H09. The key was that there was no suggestion expectations needed downgrading. We make no change to our forecasts or recommendation trigger prices, which assume 3% like-for-like contraction in the second half. We are yet to be convinced that TOL has a clear competitive advantage in Asia, apart from leveraging its Australian base. While it now has a presence across most trade intensive countries in Asia, in particular China, Japan, Singapore, and Vietnam, the company is unlikely to achieve similar penetration and network density and therefore the dominance it has in Australia. TOL believes it has an advantage in global freight forwarding (TGF), now the primary growth focus. Toll formed TGF in response to customers’ growing global logistics needs. TOL bought Hong Kong-based BALtrans in March 2008, and Australian-based Gluck in June 2008 to accelerate its TGF capability. BALtrans’ network spans 65 major cities across Asia, US, Europe, Africa and the Middle East. The acquisition added annual revenues of approximately $700 million. The much smaller Gluck was a logical add-on with its long-term relationship with BALtrans. ‘.. the formation of Toll Global Forwarding means we now have a consolidated offering across the Group, true end-to-end international supply chain capabilities, all underpinned by one point of contact across all operational components. From this base, we can leverage not only our scale and network capacities to drive superior cost structures, but also our cross-group capabilities to maximize cross-group sales and revenues