SIME Darby Bhd has entered into a conditional agreement to divest its 30% stake in Tesco Malaysia for RM300 mil. The hypermarket has been reporting continued losses since FY15 except in FY18.
Sime Darby announced that its wholly-owned subsidiaries Sime Darby Allied Products Bhd (SDAPB) and Sime Darby Holdings Bhd (SDHB) have entered into conditional agreements with C.P. Retail Development Company Ltd (CP), Tesco Holdings B.V. and Tesco Plc for the proposed disposal of 30% interest held by SDAPB in Tesco Malaysia to CP.
Affin Hwang Capital analyst Brian Yeoh said, “We believe the deal is positive, and allows the group to exit the loss-making hypermarket business. Sime is expected to receive RM270 mil in disposal gains. Nonetheless, we remain cautious on the macro environment, given the Covid-19 outbreak and maintain our sell rating.”
The proposed disposal is expected to be completed in 2HCY20, subject to local authority’s approval and completion of sale of Tesco Stores (Thailand) Ltd.
Sime has not decided how it would utilise the RM270 mil proceeds but according to its management, options include reserving cash for rainy days, paring down borrowings or a 100% payout that would reward shareholders a potential special dividend per share (DPS) of 4 sen.
Alliance DBS Research analyst Abdul Azim Muhthar said, “Prior to the disposal, Sime had written down its entire investment in Tesco Malaysia due to losses over the years. We understand there were no earnings recognised from Tesco last year.”
The announcement is in line with Sime’s ongoing non-core asset rationalisation exercise. Assuming it declares the entire RM270mil net gain as a special dividend, this would translate to around 4 sen per share or 2% yield based on the current share price.
“However, we believe the group’s cash flows could be tighter given the slower economic activity and mandatory control order (MCO) triggered by the Covid-19 outbreak. As a result, we would not be surprised if at least a portion of the sale proceeds were retained to beef up the group’s cash levels,” added Abdul Azim.
Alliance DBS Research maintains its fully valued call with an unchanged target price of RM1.65.
Meanwhile, Affin Hwang Investment Bank has maintained its sell rating on Sime Darby and SOTP-based target price of RM1.50. At 16x FY20E PER, valuations look stretched considering the challenging macro outlook.
Key upside risks are improvement in the economic environment and consumer confidence which would affect the key markets/industries that Sime operates in and stronger commodity prices spurring demand in Sime’s industrial division, it added. – April 23, 2020
