MARKETS SPECTATOR: Toll cuts a forward path

Toll's freight forwarding business has suffered recent blows from ship owners undercutting its rates, and the market has welcomed planned cutbacks for the division.

The man in charge of Toll Holdings’ freight forwarding division, Paul Coutts, blames ship owners for his unit’s $4-8 million loss in earnings before interest, tax, depreciation and amortisation in the six months to June 30. Coutts, on a conference call with reporters, today said owners of container vessels had offered rates that undercut companies such as Toll, particularly on trans-Pacific routes.

The good news for Coutts and Toll is that this is likely to change. In the last four years ship owners have mothballed their container vessels. Now they are releasing them back into the market. Earlier this year AP Moeller-Maersk, the world’s largest container shipping line, put into service the last of its mothballed container vessels. That has caused shipping rates to continue to hover around record lows, plainly unsustainable for companies such as Maersk. The Danish conglomerate says it may, along with its competitors, begin to take ships out of service again in an effort to boost freight rates higher.

Toll, however, has seen enough. It will take a non-cash impairment charge of $200 million on goodwill associated with its freight forwarding division in its 2013 earnings. Toll’s managing director Brian Kruger says the freight forwarding business accounts for about $800 million of capital employed by the company, yet will generate no return in the 12 months to June 30. Analysts have been pressing Kruger for some time to abandon his acquisition plans for the forwarding business. Today he acquiesced – but only for 12 months, or until “we’ve got the business heading in the right direction".

UBS analyst Simon Mitchell says Toll should cut $40 million in its forwarding business unit's costs to bolster margins. Kruger and Coutts have gone a little way to meeting that suggestion. Toll’s forwarding business employs 5000 workers, and some of them are being fired. The company is also closing its Zurich forwarding office. That will save it about $5 million. It wants to cut as much as $20 million out of costs in the forwarding business in the 12 months to June 30, 2014. After 2014 it plans to cut costs by as much as $50 million.

The market likes these plans. The stock was up 9.5 cents, or 1.8 per cent, to $5.345 at 1225 AEST, against a benchmark S&P/ASX200 Index gain of 65.29, or 1.4 per cent, to 4797.

The proof of a turnaround in Toll’s forwarding business will have to be seen in black and white in the next 12 months or analysts such as Mitchell will be calling on Kruger to rid himself of the unit.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles