The road to riches

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In Australia’s skewed economy, infrastructure should be a reasonably safe bet given that the ridiculous debt games have largely become a thing of the past. Royal Bank of Scotland has a buy on Toll, with a target price of $5.42. New CEO Brian Kruger is not expected to make large changes to the stategy, although he is likely to look more for growth than acquisitions. The company has an Asian regional strategy which tends to be overlooked. Toll Global Group contributes 20% of the company’s EBITA and is well positioned for Asian growth — certainly a much more convincing play than Qantas’ regional strategy and one that is already profitable.

More importantly, it is in part a mining play:

Multiple opportunities to leverage off resource industry growth The Australian mining logistics market is worth approximately A$7bn and with A$230bn of resource projects in the pipeline, we expect the market to grow strongly. TGR has multiple leverage points to this growth across the coal, iron ore, and oil & gas markets. We estimate TGR could realistically grow its organic revenue by 50% through FY17, lifting group EBITA by A$70m (a 10% CAGR). Additionally, we estimate TOL generates a further A$20m from resources related work in its other domestic transport businesses that should benefit as well. LNG the likely target for acquisitions. We think there are potential acquisition opportunities that would bolster TOL’s resource offering, particularly in the growing LNG industry; however, price is likely to be an obstacle for some of the more attractive players. We therefore expect TOL to focus more intently on the organic opportunities noted above.

The stock has a healthy dividend yield of over 5% and a prospective earnings multiple of under 12 times, which is reasonably safe. Morningstar says the downside is Toll’s exposure to retail, as Morningstar observes:

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Management believes economic conditions will remain challenging in FY12, with the domestic retail and industrial sectors set to struggle in the next year. A strong December quarter in the retail sector will greatly assist TOL’s 1H12 financial results. More than 10% of Australian revenue stems from the consumer discretionary sector. Major customers include Woolworths, Wesfarmers and Fosters. But TOL expects benefits from the strength in the resources sector for Toll Global Resources – the Marine Logistics, Mining Services, Offshore Petroleum Services, Energy and Remote Logistics businesses.

The stock has dramatically uinderperformeed the S&P/ASX 200 over the last two years, mainly on doubts about the management. But it has a chance of being that wonderful asset in the current market: a boring but reliable stock.

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