Morning analysts have today raised their fair value estimate for Tesco (TSCO) shares from 230p to 253p after recent full-year results and a more constructive outlook on the supermarket’s core UK food market.
From its high of 266p on 10 August, Tesco's share price has declined more than 20%, erasing its sector-beating year-to-date return. With shares at 210p at the time of writing, the stock is trading roughly at a 17% discount to our new fair value estimate, an attractive buying opportunity, in our opinion. In the absence of any meaningful hard catalysts in the quarters and months ahead, we believe that the stock's dividend growth potential should be appealing to the patient long-term investor. We expect dividends to grow at a 15% compound annual growth rate over the next five years.
Our new fair value estimate reflects a more constructive outlook on Tesco's core food retail and wholesale businesses in its largest market, the United Kingdom, which outweighs our lower top-line and bottom line estimates in the international segment. Further, our fair value estimate implies a price/earnings ratio of 18 times in the 2019 financial year and a 2% dividend yield, in line with the respective average trading multiples of Tesco's UK peers.
In the UK and Republic of Ireland segment, we now expect less growth coming from online, the result of a conscious decision taken by Tesco to rationalise the economics of the channel by raising the minimum order value, while we expect Booker sales to grow almost by 6% annually over the next five years, versus our earlier 5% estimate.
We now expect sales in the international segment – with 17% of sales – to decline 1.2%, with Asia mostly flat and sales in Europe down by 2.3%.
