Image source: Getty Images
Shares in FTSE 100 private equity group 3i Group (LSE:III) jumped 14.05% this week. The main reason is that Action – the firm’s largest investment – is growing better than expected.
Hindsight is a wonderful thing. But did investors have a chance to see this one coming?
The update
Action makes up around 75% of 3i’s net asset value. That kind of portfolio concentration can be a risk, as investors have been seeing this year.
Ahead of its AGM, however, 3i confirmed that Action delivered like-for-like sales growth of 3.3% in the year to 21 June. That’s a recovery from the 2.4% reported earlier in the year.
3i CEO Simon Borrows said that Action was set for a strong quarter of profit growth. And 105 new store openings boosted sales even further.
The recent weakness has largely been in France, where consumers have been cautious. But attentive investors might have seen some positive signs in advance.
Vive la France
B&M European Value Retail had been facing similar challenges to Action in France recently. But that changed in the company’s latest report.
When B&M published its full-year results earlier this month, France was the standout contributor. And that might have caught the attention of 3i shareholders.
Consumer spending had been weak across the Channel. This had been affecting both B&M and Action.
3i hasn’t given a geographic breakdown of Action’s results. But if they’re driven by a return to form in France, investors might think they had a chance to see it coming.
Is it too late to buy?
Officially, 3i values Action an EBITDA multiple of 18.5x, net of a liquidity discount. That’s not my favourite metric, but it’s the one they use.
Unofficially, that’s a big multiple for a retailer. But that’s not necessarily the price investors pay by buying 3i shares.
After falling 21.12% since the start of the year, the stock now trades at a 16.4% discount to the reported NAV of 3,030p per share. So the implied EBITDA multiple on Action is roughly 15.
That’s still high compared to other retailers. But in a lot of ways, Action isn’t like other retailers and I think that makes 3i shares worth considering.
Growth prospects
Action is looking to add more than 4,650 European stores to a current base of 3,335. That’s a long runway for future growth.
Exposure to a fast-growing retailer is hard to find in the UK stock market. Tesco and Greggs are excellent businesses, but neither is growing sales at 14% a year.
Action also aims to expand into the US. The potential is real, but so are the challenges.
Dollar General and Dollar Tree will be tough competitors. So the US is an exciting possibility, but there are no guarantees.
Final thoughts
3i remains a buy for me personally. The falling share price makese the implied multiple on Action more attractive than the headline figure suggests, and there’s reason to believe the French consumer story may be turning.
The growth runway is long and the potential is real. But investors buying at 2,490p are not getting the deal available to those who bought at 1,825p.
I’m still interested in buying at today’s prices. But it’s a bit closer than it was a week ago.
Should you invest £5,000 in 3i Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if 3i Group Plc made the list?
Stephen Wright owns shares in 3i Group.