Huntleys' Stock of the Week

Recommendations: Accumulate

TOL's current stock prices

Dividend reduction a certainty

Investment Rating:

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 grown very effectively via multiple acquisitions. Strong cashflow is a recurring feature. 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. In 2008 it distributed its holding in Virgin Blue to shareholders. Despite a leading position in the Australian market, management still expects to grow revenues organically at twice GDP excluding acquisition growth. This reflects still relatively low level of logistics outsourcing by some Australian companies. Asia offers high growth potential but at greater risk. Its resilience during the economic crisis underscores the quality of TOL's earnings and balance sheet. Historically TOL has traded on a high PE multiple and relatively low dividend yield reflecting growth potential.

Event:

• FY09 revenue increased 16% to $6.5bn.

• Organic growth was 1.3% in Australia/NZ and 1.6% in Asia.

• Adjusted for amortisation EBIT of controlled businesses rose 2.9% to $425.2.

• Share of associates's NPAT jumped from $5.2m to $21.2m.

• Before non-recurring items and excluding the Virgin Blue (VBA) holding in FY08, NPAT rose 9.4% to $303.1m after adding back $32m of amortisation.

• On the same basis EPS was 4.5% higher at 44.8c.

• DPS was constant at 25c fully franked.

Impact:

• Cash flow was exceptionally strong. Net operating cash flow of $716m easily funded $310m of net capex and $95m of acquisitions and investments. A 20% fall in trade receivables boosted cash. Net debt to equity fell from 60% to 14%. EBIT interest cover was high at 16.5 times. MD Paul Little said TOL remains on the hunt for acquisitions, with several near consummation.

• Regarding the outlook TOL said: 'Trading conditions in the short term are expected to remain generally flat with some improvement evident across Australia and Asia.'

• We increase our valuation to $8.00 reflecting margin resilience and TOL's balance sheet and management capacity to take advantage of the downturn. Earnings will benefit strongly from any global economic recovery.

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