- Dutch retailer provides bulk of the valuation uplift
- Market reaction suggests shares fairly priced
- Listed infrastructure business a small drag
The UK’s largest listed private equity firm, £17 billion market-cap 3i Group (III), posted an impressive return for the year to March thanks to a standout performance from its largest investment.
However, after a 30% rally year-to-date, the shares look fully up with events and only managed a 1% gain to £17.56, marginally above their latest NAV (net asset value).
STRONG PORTFOLIO RETURNS
The total return for the 12-month period was £4.885 billion, or 36% on opening shareholder’s funds, leading to an NAV of £17.45 per share including a 65p per share gain on foreign exchange movements.
The private equity portfolio delivered a gross investment return of £4.966 billion or 40%, with the bulk of the increase due to strong trading at Dutch non-food discount retailer Action.
For the year to 1 January 2023, Action posted net sales of €8.86 billion, up 30% on a reported basis and 18% on a like-for-like basis, driven by higher footfall and an increase in the number of transactions.
EBITDA (earnings before interest, tax, depreciation and amortisation) rose 46% to €1.2 billion, and based on projected EBITDA of €1.44 billion this year 3i’s 52.9% stake in the retailer was valued at £11.188 billion as of the end of March, 56% more than a year ago.
That means the firm’s stake in Action now accounts for 60.8% of 3i’s entire private equity portfolio compared with exactly 50% a year ago.
Chief executive Simon Borrows commented: ‘Our portfolio has been carefully assembled and its resilience and consistent financial performance in recent years reflects the benefits of thematic investing, disciplined pricing and active asset management.
‘No portfolio company reflects this approach better than Action, which continues to be 3i's largest and most resilient portfolio investment. We are now focused on developing a select number of other companies to fulfil their potential to also become long-term compounders.’
ANALYST VIEW
Liberum strategist Joachim Klement was positive on the results and the potential for 3i to continue beating forecasts.
‘Thanks to the strong performance of Action and beneficial foreign exchange movements the string of income beats by 3i continues. However, the momentum of comprehensive income surprises seems to wane and next year will be a tough one given the strong comps the company will have to beat. On the other hand, consensus estimates for comprehensive income in 2024 are very modest at £2.386 billion, so beating current expectations should very much be in the cards again.’
Aside from Action, Klement is positive on the upside potential for 3i Infrastructure (3IN) which generated a total return on opening NAV of nearly 15% last year and but whose shares have performed poorly meaning 3i’s 29% stake is only worth £841 million against £934 million a year ago.
‘The share price of 3IN is currently very depressed but we expect this to normalise in 2023, creating additional uplift to the infrastructure holdings of the company and its NAV’, argues Klement.
‘The operational performance of 3IN and the other infrastructure holdings of the company remains very strong and should continue to grow at double-digit rates, creating a significant boost to comprehensive income in 2024.’
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