Forecast backs our case says Toll head

By PAM GRAHAM

Toll Holdings managing director Paul Little could not believe it. The day he came to Auckland to argue Toll's management credentials, Tranz Rail issued a profit downgrade.

"How could anyone have anything other than a critical view of a public company that has downgraded its forecasts five times in 12 months," Little said.

Tranz Rail cut its operating profit forecast for the financial year ending this month to $40 million from estimates of $47 million in April, $53.1 million in December and an original estimate of $55.8 million.

The latest downgrade was due to an accounting change that removed $3.1 million of revenue, and soft trading - although the bottom-line forecast was little changed at "in excess of $30 million".

Toll's presentation to institutional shareholders gives four reasons why its offer of 95c a share for Tranz Rail should be accepted over a Government plan to buy back the track and support the operating company.

Tranz Rail fitted Toll's strategy of developing integrated multi-modal logistics services, Tranz Rail provided a platform for Toll to create a pre-eminent position in New Zealand, Toll shared everyone involved's vision about the role of rail, and Tranz Rail would benefit from Toll's management.

Little used the profit downgrade to reinforce the last point.

"I've never said Tranz Rail is a basket case. It is a good business that is poorly managed."

He was not going as far as RailAmerica in promising shareholders that an acquisition would add to earnings immediately.

At present, rail carried about 20 per cent of New Zealand's freight.

"I'm absolutely convinced that rail transport within the next five years in New Zealand can at the very minimum double the volume that moves."

Toll would link Tranz Rail with Toll's existing port and warehouse operation in New Zealand.

"And we will build up the TranzLink side of their business, which is quite a good business. The service level is very high but it doesn't make any money. We think that can be improved."

Offers closed on TranzLink, Tranz Rail's trucking and freight forwarding business, yesterday. Toll has said it will put in a bid, and Owens Group confirmed yesterday that it had made a bid.

In Australia, Toll has signalled plans to increase the amount of cars and hazardous waste transported on rail.

"Anything that moves by road transport can move by rail," Little said.

He said Toll was comfortable with operating roll-on-roll-off ferries because it ran them between the Australian mainland and Tasmania.

Tranz Rail owns 27 per cent of Tasmanian rail operator Australian Transport Network, which was a fit with Toll's shipping business.

ATN had net assets of A$43.5 million last year, when Tranz Rail wrote its stake down from $13.8 million to $1.2 million.

Toll has net debt to equity gearing of 44 per cent and its earnings cover its present interest costs by eight times. It can fund a Tranz Rail acquisition.

Little and executive director of operations Mark Rowsthorn collectively own 24 per cent of Toll, which under their stewardship has made 34 acquisitions in 14 years.

This time Toll is competing with a Government plan to buy back the track and bail out the operator - and it is offside with Finance Minister Michael Cullen.

The Government has said it will not change its plans as a result of Toll's bid.

Little would not discuss publicly what Toll wanted in an access regime if the track was Government-owned: "It's too complex and it's too sensitive."

The only comment on the proposed exclusive access regime with a "use it or lose it" test still to be worked out was: "I'm not saying we'll accept that model at all."

Discussion was limited to a private meeting with an official from Cullen's office yesterday.

Little will also meet fund managers who must be won over before a shareholder vote, now expected by August 8.

Cullen has blasted Toll publicly for not taking an earlier chance to avoid a collision course with the Government.

Little said it was a 50:50 call between upping the bid and walking away. Greater knowledge of the company, the Government's position and the potential of moving freight off rail on to road in New Zealand prompted Toll to stay.