Broker snap: Tesco's international business undervalued

21st Oct 2009 12:12

The international business of Tesco is undervalued, according to Nomura Securities, which reckons the UK-based retailer has the potential to effectively create a 'new company' over the next five years.Nomura believes 'Tesco will effectively create "a new company" with sales of £27.3bn, EBITDA of £2.65bn, an underlying EBIT [earnings before interest and tax] margin of 7.3% and CROI of 25.9%, far superior to the existing one.'If Tesco does complete this amoeba-like transformation, Nomura estimates that the 'new company' alone could be worth £16.4bn, or 209p per share. This has prompted the broker to lift its price target from 405p to 526p, 'offering 39% upside potential to current levels'. The broker has reiterated its 'buy' recommendation.Nomura sees the 'rapidly maturing' international business creating £8bn of value, equivalent to 101p per share, over the next five years.