Australia | May 17 2012
– Toll cuts full year earnings guidance
– Changes reflect margin pressure and difficult market conditions
– Brokers adjust earnings forecasts and price targets lower
– UBS and Deutsche Bank downgrade ratings
By Chris Shaw
Logistics leader Toll Holdings ((TOL)) yesterday presented revised earnings guidance to the market, indicating EBIT (earnings before interest and tax) for FY12 would be in a range of $400-$420 million. This compares to a previous consensus estimate of around $450 million.
Toll attributed the change in earnings outlook to ongoing margin deterioration in the group's domestic operations as well as further underperformance in both the Footwork Express and Global Forwarding business. JP Morgan notes the margin pressure stems at least in part from aggressive price competition to win market share.
Brokers have been quick to respond to the update, with earnings estimates being cut across the market. As examples, JP Morgan has lowered its earnings per share (EPS) forecasts by 10% in FY12 and by 14% in FY13, while Credit Suisse has cut its estimates by 13.6% and 8% respectively.
Consensus EPS forecasts for Toll according to the FNArena database now stand at 38.5c for FY12 and 43.3c for FY13, meaning FY12 earnings are now expected to come in below the 39.3c recorded in FY11.
The changes in earnings estimates have impacted on price targets, with the consensus target according to the database falling to $5.09, this down from $5.77 prior to the update. Ratings have also changed, with both UBS and Deutsche Bank downgrading Toll to Hold recommendations from Buy previously.
For UBS the big issue for Toll is continued earnings risk, an issue also picked up on by JP Morgan. As the latter points out, a mix-change means Toll Global Resources is increasing its exposure to Australian resources where new entrants are impacting on margins. This trend may not be full factored into market expectations in the view of JP Morgan.
Elsewhere, issues in the non-core Footwork Express business means a sale is a possibility, but in the view of JP Morgan this process may be delayed given in the current market environment it would be difficult for the business to generate a sale price in line with book value of around $210 million.
In Deutsche Bank's view the problem from an investment perspective is the latest update indicates Toll's earnings are currently quite volatile, which the broker doesn't see as so attractive given the current uncertainty in economic conditions. This is enough for Deutsche to move to a Hold rating.
The Deutsche Bank argument is similar to taht offered by BA Merrill Lynch in reiterating its Neutral rating – namely, while the stock appears cheap on fundamentals the earnings risk in place through FY13 is likely to limit the scope for share price outperformance.
The only dissenter from a Neutral rating on Toll among brokers in the FNArena database is Macquarie, which retains an Outperform recommendation. In Macquarie's view management at Toll is addressing the issues it can control and continues to be focused on return on capital employed, which increases the potential for the sale of non-core assets such as Footwork Express and Marine Logistics.
This supports Macquarie's expectation returns for Toll will improve over the next 12 months, which implies share price upside from current levels. As well, Macquarie notes its earnings forecasts imply a fully franked yield of better than 5% going forward, which will boost shareholder returns.
At current levels the Toll share price implies upside of around 15% relative to the consensus price target in the FNArena database, which lends support to the view the stock offers some value at current levels.
Shares in Toll today are weaker in a down market and as at 12.10pm the stock was 38c or 8% lower at $4.35. This compares to a trading range over the past year of $3.70 to $5.98.
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