Toll Holdings

We ceased coverage on transport company Toll Holdings back on 23 Dec 10, as we were increasingly uncomfortable with its world-conquering strategy. Since then, company founder Paul Little has stepped down as managing director and been replaced by Brian Kruger.

Less than five months into the job, Kruger yesterday had the dubious honour of announcing a profit warning. Toll’s exposure to weak retail conditions domestically and globally is the main reason. The share price has now fallen 22% over the past two days, which is normally enough to pique our interest.

Having taken a closer look at the accounts, though, any interest has evaporated. The company has been spending a truckload on capital expenditure over the past few years, so free cash flow has been poor. While the balance sheet looked reasonable a few years ago, debt levels continue to rise due to acquisitions. Operating margins have also declined in recent years as Toll has expanded internationally.

Toll may recover if there’s a cyclical upturn in retail, but this is a weaker business than many long-term shareholders probably believe. Nor is the price sufficiently attractive, which is why we’re sticking with COVERAGE CEASED.