It has been an unpleasant few years for shareholders in Toll Holdings (ASX: TOL). In the past five years, while the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) was virtually flat, the share price of Toll is down 22%.
Many investors lay the blame for Toll's languishing share price squarely on the gung-ho acquisition strategy of the previous CEO, Mr Paul Little. Amongst the acquisition spree was the ill-timed and overpriced acquisitions relating to Toll Express Japan and Toll Global Forwarding. The company has since been forced to write off $168 million against Toll Express Japan in 2012 and take a $215 million charge against Toll Global Forwarding in 2013.
For the financial year just ended, Toll reported revenue in line with the previous year of $8.7 billion and a 3% increase in net profit after tax (NPAT) but before non-recurring items of $282 million. Adjusted earnings per share dipped slightly to 41.3 cents per share (cps) but were stable enough to allow the board to declare dividends for the year totalling 27 cps, a 2-cent increase on the prior year.
It appears that current management has wised up to the need to focus on returns on invested capital (ROIC) – a measure that previous management clearly wasn't concerned with. ROIC is still well below Toll's cost of capital but at least it is headed in the right direction, increasing from 7.4% to 7.6% year on year.
Management has stated there will be no further merger and acquisition activity until returns improve and has also reigned in spending on growth capital spending so that only critical sustaining capital spending is undertaken. These initiatives are pleasing to see.
However, with net debt of $1.273 billion and net tangible assets of just $1.036 billion, the balance sheet is still weak and the company is not exactly out of the woods yet.
Foolish takeaway
Toll doesn't have any close-listed peer to compare operations with, however other freight and logistics firms such as Brambles (ASX: BXB) and Asciano (ASX: AIO) would appear to have performed more robustly over the past year compared to Toll. Whether investors are better off backing Toll's turnaround or buying the stronger yet more expensive Brambles or Asciano really depends on Toll management's ability to improve returns further.
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Motley Fool contributor Tim McArthur owns shares in Toll Holdings.
