Tesco could pay special dividend upon Malaysia-Thai exit, say analysts

LONDON: Tesco Plc analysts see the potential for a special dividend after the UK supermarket chain confirmed it’s carrying out a strategic review of its operations in Thailand and Malaysia.

The Asian assets could be worth as much as £9.5 billion, which would hypothetically equate to a special dividend of up to 100 pence a share when adjusting for earnings revisions, according to analysts at Citigroup Inc.

Tesco said it had received “inbound interest” in the units and Shore sees family office and private equity investors in Asia as possible suitors.

Shares in the UK grocer rose as much as 5.9% on Monday, leading the Stoxx 600 Retail Index higher.

The company is up 28% this year in London trading, outperforming supermarket peers J Sainsbury Plc and Wm Morrison Supermarkets Plc.

Here’s what else analysts are saying:

Bernstein, Bruno Monteyne: A possible sale of Tesco’s Asian business makes sense because the UK retailer doesn’t get credit for the high-quality business.

The Thai business is “hugely undervalued” as part of Tesco, and the unsolicited interest for the asset is enough for the retailer to justify considering a sale.

A valuation of between £6.5 billion and £7.2 billion for the Asian business would be fair.

Rates outperform, price target 290 pence

Citi, Nick Coulter: A valuation of between £7.9 billion and £9.5 billion is possible and any asset sale would probably get a full valuation.

The announcement could also increase the potential for a competitive auction.

If all of the proceeds were to be returned to shareholders as a special dividend, this could equate to between 80 pence and 100 pence a share, factoring in an 18% earnings per share revision.

Rates buy, price target 290 pence

Jefferies, James Grzinic: Tesco has a good chance of exiting Asia strongly, given the interest from potential buyers. Shareholders should expect a large cash distribution following the asset sale.

Price target raised to 310 pence from 285 pence, buy rating reiterated

Shore, Clive Black: Family office and private equity investors in Asia could be among those that might be interested in the “trophy asset”.

An eventual transaction could result in a material distribution to shareholders, though it would also be removing a key growth area for Tesco.