The surge in Wesfarmers Ltd's (ASX: WES) share price has prompted some investors to search for other stocks that can make similar value-adding divestments.
One potential candidate is property and construction group Lendlease Group (ASX: LLC) with Citigroup speculating that the group could also enjoy a surge in its share price if it were to spin-off its Engineering division in the same way that Wesfarmers is divesting its Coles supermarket division.
The decision by Wesfarmers to drop Coles into a separately listed entity via an in-specie distribution (where shareholders will get shares in the new Coles stock that is in proportion to the number of Wesfarmers shares they hold) triggered a more than 6% rally in Wesfarmers' share price last week.
"We believe LLC could also unlock value via an in-specie distribution of its Engineering division as we believe the market is likely to place a higher multiple on LLC [excluding] engineering than currently," said Citigroup.
"Our analysis indicates ~25% upside from current levels under an Engineering spin-off scenario."
There are other reasons why Lendlease may want to consider undertaking such a move apart from the potential uplift in the value to shareholders.
Citigroup notes that its Engineering division has a "questionable track record" as highlighted by the $190 million provision the group had to make due to underperforming projects when it released its first half results last month.
The broker also believes the Engineering business offers little synergies to the rest of Lendlease's operations and that the business lacks scale to drive superior returns.
There are also concerns that the engineering division is proving to be a distraction to management, added the broker.
While an in-specie distribution isn't the only way for Lendlease to shed the division from its portfolio, Citigroup thinks it is potentially the best way to unlock value due to a number of reasons.
Firstly, there is a market appetite for engineering stocks as shown by the strong performance of sector heavyweight Cimic Group Ltd (ASX: CIM).
It also limits the earnings dilution to Lendlease's shareholders when compared to a trade sale and a spin-off could attract a takeover bid for the Engineering division given the cleaner ownership structure.
However, even without divesting the business, Citigroup thinks Lendlease is worthy of a "buy" rating due to its undemanding valuation. The broker has a $19 share price target on the stock.
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