The 3i Group (LSE: III) share price was up 1.3% in early morning trading today (18 July) following the release of the firm’s Q1 performance update.
That takes the stock’s total gain for the year to 32.6%. It’s up 61.1% in the last 12 months and a whopping 178.5% in the last five years.
That’s impressive. The investment firm specialises in private equity and infrastructure, targeting mid-market companies in Europe and North America. It has far outperformed the FTSE 100 in recent times.
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Let’s take a closer look at why it’s climbing and if it could be a stock for investors to consider buying today.
An encouraging start
There were plenty of positives to take away from its update, with the firm calling its performance in the quarter an “encouraging start” to FY25.
For the period, there was a 4% increase in its net asset value (NAV) per share to 2,167p. That compares to a NAV of 2,085p on 31 March, even despite a negative foreign exchange translation impact of £113m or 12p.
Action
But most of the talk was about Action, the Dutch non-food discount retailer that makes up around 65% of the group’s total portfolio.
During the quarter, Action’s net sales rose to €3.2bn while earnings before interest, tax, depreciation, and amortisation (EBITDA) climbed to €446m.
In the six months to 30 June, like-for-like sales grew 9%. 3i also announced that it had increased its gross equity stake in the business from 54.8% to 57.6%.
Aside from Action, CEO Simon Borrows said the group was “encouraged by the good start to 2024” for the remaining portfolio. He highlighted how 3i was “seeing positive developments in some of the assets which experienced headwinds in 2023”.
Valuation
The strong performance of Action has been a major catalyst in the group’s share price soaring. But that also comes with risks.
With it making up nearly two-thirds of its portfolio, that means the investment trust is massively unbalanced towards just one company.
The fast-growing Dutch retailer is going from strength to strength. However, any sign of a slowdown would most likely see the stock take a tumble.
More widely, the private equity industry will continue to face challenges with the lingering risk of inflation. High interest rates are also a concern. That’s on top of the trust trading at a whopping 48.5% premium to its NAV.
A top performer
But despite these challenges, the stock has been delivering over the last few years, highlighting its resilience. It’s the third-best-performing stock on the FTSE 100 in the last five years and the fourth-best in the last 12 months.
Its solid performance may be in part due to its healthy balance sheet. It has liquidity just shy of £1.3bn. That includes £336m in cash as well as £900m in an undrawn revolving credit facility. It also has a modest gearing of just 4%.
One to consider
Despite its lofty valuation, I think it could be a stock for investors to take a closer look at.
If 3i Group wasn’t on my radar, it certainly is now. I’ll be doing some further digging into the company in the weeks to come.
That’s especially after Citigroup reaffirmed its Buy rating for the stock on 15 July. The bank has a 3,800p target price.
