What: Transport, freight and logistics group Toll Holdings Limited (ASX: TOL) has produced a 5.7% increase in underlying profits after eking out a gain in revenue of just 1.1%. While the return on invested capital remains sub-par, investor enthusiasm for the company was buoyed by a 55.1% surge in free cash flow to $355 million and a one cent increase in the full year dividend to 28 cents per share.
So what: Having touched a one-year low of $5.01 in June, shareholders have been in need of some good news to help get the share price ticking higher. With the share price closing Wednesday at $5.68 the stock is now trading on an adjusted FY 2014 price-to-earnings ratio of 13.8 and a fully franked dividend yield of 4.9%.
Now what: Management has commented that its restructuring program should provide between $40 million and $50 million in cost savings during FY 2015. These savings, which include improvements to the disastrous Toll Global Forwarding business, are expected to deliver higher earnings to shareholders in the current financial year assuming no material changes in Toll's operating environment.
The question for investors is how much growth will be forthcoming? Given the low margin, weak balance sheet, tough economic climate and high fixed cost base of Toll's operations, the current multiple would appear reasonable in the absence of big revenue growth to which the firm has good leverage to boost earnings.
