Toll Holdings Restructure Not Enough For Brokers

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-Modest cost reductions
-Margin pressures continue
-Relief regarding FY14 guidance

By Eva Brocklehurst

Brokers remain wary of Toll Holdings ((TOL)). The transport and logistics company is reallocating the five business units that comprise its Specialised and Domestic Freight (SDF) division to other divisions to reduce costs and improve efficiencies, with the result 100 jobs will go while savings of $10-12m are envisaged from FY15.

The company has reiterated earnings guidance for FY14 to be similar to FY13 and this highlights the difficulties Toll faces in achieving sales growth, earnings growth and margin expansion. Those brokers which have reviewed the stock so far in response to the news of the restructuring have moderated their earnings estimates for FY15. All note the background is one of subdued activity amid margin pressures.

The changes do not go far enough, in JP Morgan's opinion. The broker believes outright divestment of some segments is needed to make substantial changes in the company's earnings performance, given current market conditions. Rationalisation is a positive, of course, but several brokers consider there are still too many businesses. The company manages over 45,000 people across 27 units in 50 countries. This is inefficient and partly the reason why returns are sub-optimal in JP Morgan's opinion, hence a downgrade to Underweight from Overweight. Citi is confident the restructuring will offset margin pressures, somewhat. These pressures have been evident for a few years, so Citi also believes there needs to be a larger restructure to configure the competitive positioning of key businesses.

The SDF division will be merged with Domestic Forwarding. Hence the company will have five divisions instead of six. Changes will take effect from July 1 so the company will report its FY14 results under the existing structure. Domestic Forwarding will gain Express, NQX and Linehaul & Fleet Services. Toll Liquids and Toll Transitions will be moved to Global Resources because of the contract nature of the businesses. Specialised parts of Intermodal will be incorporated into Global Logistics and the Queensland freight forwarding business will be merged into NQX.

CIMB Securities has tempered earnings forecasts and likes further efficiencies, but does not expect real volume recovery any time soon. There are better opportunities in the logistics sector for the broker, including Asciano ((AIO)) and Brambles ((BXB)). BA-Merrill Lynch takes the guidance as a positive development, because many in the market feared Toll would downgrade earnings forecasts. A challenging market means the broker does not necessarily think the cost savings will add to the bottom line. Still, Toll has been criticised for not being vigilant on costs in a weak economy so Merrills expects the restructuring news will erase a few frowns.

 Goldman Sachs notes some risks relating to the re-tender of Singapore government contracts but found the reiteration of guidance a welcome relief, as it demonstrates Toll has been able to offset the challenges with some contract wins. Toll has never disclosed the significance of the Singapore contracts but Goldman calculates they could represent around 4% of group earnings.

On FNArena's database Toll Holdings has a mixed bag of ratings. There are two Buy, four Hold and two Sell. The consensus target is $5.42, suggesting 0.7% downside to the last share price. Targets range from $5.10 to $6.10. The dividend yield on consensus forecasts for FY14 and FY15 is 5.1% and 5.4% respectively.
 

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