Considering the mixed signals out there regarding the future of global economic growth, looking for defensive shares in which to invest seems like a good idea.  Australia’s economy is closely linked to China; so what kind of signals are we seeing about the near term growth of the Chinese economy?

In May of 2011, investment bank Goldman Sachs lowered its GDP forecast for China for 2011 from 10.0% to 9.4%; and its 2012 forecast from 9.5% to 9.2%.  No country comes close to matching those reduced forecasts.  The RBA and others project around 4% growth for Australia in both 2011 and 2012.  A few years back, some experts in the United States cautioned China’s GDP would drop to between 6% and 7%.  It never happened.  

The fact is no one can predict economic growth or an economic catastrophe with 100% accuracy.  However, when you factor in concerns about sovereign debt around the world and that markets often react to conditions based on fear and not fundamentals, looking for defensive shares right now just seems to be plain old-fashioned common sense.

In last week’s Broker Buys column on, analyst Richard Batt of Shadforth Financial Group gave us a share worth looking into – Toll Holdings (TOL), one of the leading providers of logistics and transportation services in the Asian region.

Batt claims it is a worthy candidate for a long term holding based primarily on the company’s multiple income streams.  In addition, we learned from UBS that TOL may be a takeover target, due to its recently depressed share price.  

How can a share in the volatile transportation sector be considered defensive?  And why would anyone be interested in acquiring TOL if the current economic tremors elevate to the level of a full-blown earthquake?  First, let us look at the share price.  Here is a six month chart for share price movement for TOL:


So what has happened here?  On 24 February 2011 Toll beat its earnings forecast but issued a cautionary outlook based on a slowing retail and automotive sector.  As you may know, in January 2011 Woolworths lowered its guidance for 2011, based on lowering consumer confidence and other factors.  There were significant weather related issues as well, all possible explanations for declining share price.  What about performance?  Let us take a look at some fundamental financial ratios.

Valuation Ratios

We can fast forward to July 2011 and see how market participants view Toll’s prospects, based on valuation ratios.  We will compare Toll with one of their closest competitors, Asciano Limited (AIO).  Here are the numbers:

  TOL AIO Transportation Sector
P/E (Price to Earnings) 11.42 22.81 15.82
P/B (Price to Book) 1.2 1.86 1.26
P/EG (Price to Earnings Growth) 2.13 .41 1.68
P/S (Price to Sales) .47 1.81 1.52
DY (Dividend Yield) 5.4% 0 4.5


The numbers tell us market participants are still fairly optimistic about Toll’s future prospects.  The P/E ratio indicates current share price may be slightly undervalued when compared to the Sector average, although the PEG ratio paints a contrasting picture.  Note that TOL pays a respectable dividend, another mark of a defensive share.  

Leverage Ratios/Total Debt/Debt to Equity

Liquidity is a measure of a company’s ability to convert assets into cash in the event of a short term financial problem.  To qualify as a defensive share, a company’s total debt and debt to equity should be low enough to withstand unanticipated economic shocks.  Here are some numbers:

  TOL AIO Sector
Current Ratio 1.33 1.12 1.15
Quick Ratio 1.21 1.02 1.04
Total Long Term Debt $1,404m $2,750m N/A
Debt to Equity 55.6% 88.6% N/A


Neither company has liquidity issues; and TOL’s debt position looks much more favorable than Asciano.  However, it bears further investigation.

Checking the financial reports section on the Toll Holdings website yields some interesting information in one of their recent investor presentations.  The company has secured a three year debt facility at $400 million a year to extend the average life of their debt to 2.1 years.  A company press release says the new facility will reduce borrowing costs and came at very competitive rates.  Low rates are good indicators of lenders recognition of a company’s financial strength.

The final set of numbers we want to look at is a year over year comparison of revenue, net profit after taxes, and earnings per share.  These numbers were released in the company’s Half Year (HY) report on 31 December 2010.

Year over Year (YOY) Performance

  31 Dec 2010 (HY) 31 Dec 2011 (HY) Variance
Revenue  $3,305m $4,239m +28%
Net Profit After Tax (NPAT) $147m $173m +18%
Earnings Per Share (EPS) 22.1cps 25.5cps +15%


As you can see, going into the slowdown that commenced in early 2011, Toll Holdings was returning a solid performance for their shareholders.  Since TOL issues its annual report in August, the six month period till the end of 2010 represents the first half of earnings for Fiscal Year 2011.

As you know past performance is not always a good indicator of the future.  In TOL’s case, we need to know the nature of the multiple income streams that caused analyst Richard Batt to issue his Buy recommendation.  

We return to the most recent Investor Presentation on the Toll website where we find a breakdown of the company’s income streams and the percentage each contributes to total revenues.  

Revenue Breakdown by Sector

•    33% – Retail and Fast Moving Consumer Goods (FMCG)

•    29% – Other

•    13% – Mining and Resources

•    12% – Government

•    7% – Automotive

•    6% – Industrial

This breakdown doesn’t give us the full picture, since we do not know what is in the second largest revenue stream -Other.  However, 33% from retail is matched by the 31% revenue contribution from mining, government, and industrial; sectors less prone to suffer from declining consumer spending.  Here are the revenue streams included in that Other category.

Other (29% of Revenue):

•    Transport

•    Paper & Packaging

•    Finance and Insurance

•    Chemicals and Agribusiness

•    Business Services

•    Consumer Services

•    Utilities

•    ICT

•    Health and Pharma

•    Media & Print

The final piece of our puzzle is the company’s aggressive expansion efforts.  From the company website, we find this list of acquisitions made in the last year:

1.    DPEX  -July 2010

2.    Genesis Forwarding – July 2010

3.    WT Sea Air – Aug 2010

4.    North Queensland Couriers – Sep 2010

5.    Truck Gleam – Oct 2010

6.    Magpie Couriers – Nov 2010

7.    McLaughlin Freightlines – Dec 2010

8.    SAT Albatros – Feb 2011

9.    Mitchell Corporation – May 2011

How many companies do you know that make 9 acquisitions in a single year?  From reading the company’s annual report, we learn they have major plans to increase their presence in the resources sector.  Take a look at the world map in the report highlighting the parts of the world where they have a presence.  Although they are an Australian company, their goal is to build on their position as the major logistics and transportation services player in the Asian region.

While there is no such thing as certainty in life, the aggressive expansion; the geographical reach; and the multiple sources of revenue bode well for the long term future of this company.

>>Back to the newsletter to view other articles – July 30th 2011

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