The 3i Group (LSE:III) share price was down 3% this morning despite an impressive trading update released today (1 February).
This UK-based private equity and venture capital company revealed a 7.8% increase in net asset value per share in Q3 (ending December 31 2023).
Most notably, the report reveals an excellent result from one of its main investees, Action. 3i Group owns a 55% stake in the Netherlands-based non-food discount retailer. Action reported net sales up 28% and a 34% increase in its operating earnings before interest, tax, depreciation, and amortisation (EBITDA).
Naturally, the impressive performance paid off well for 3i Group. The company’s significant stake in Action was valued at £13.78bn at the end of Q3 2023. This earned it a £189m dividend in December. 3i received an additional £109m in proceeds from a £26m stake in fellow Dutch firm, Royal Sanders, which was successfully refinanced in December.
Is 3i Group a buy?
Today’s update revealed 3i Group has approximately £1.57bn in liquidity largely made up of £666m in cash and a £900m revolving credit facility. Accounting for cash and cash-like assets, its net debt comes to £542m, leaving 3i Group with a clean balance sheet.
The company has doubled its equity in the past three years, up from £9bn at the start of 2021 to its current level of £18.2bn. In the same timeframe, its gross debt has remained relatively stable at around £1.2bn, leaving it with an impressive debt-to-equity (D/E) ratio of only 6.6%.
However, all this doesn’t seem to equate to any guarantee of future growth. Based on several analysts’ predictions, I found 3i Group’s annualised earnings growth rate sits at only 4.6%. Meanwhile, its earnings per share (EPS) growth rate is forecast to decline by 4.8% per year.
Dividend-wise, there isn’t much to report on – 3i Group pays a 2.3% dividend with a 12% payout ratio, leaving little to be desired there. Return on equity (ROE) is also forecast to be lower in three years, down from 24.6% to 17.2%.
My verdict
Despite some uninspiring forecasts from analysts, 3i Group’s management appears to be making good decisions. As a result, the company looks to be operating efficiently. I think it operates a successful business model, with a focus on the profitable personal care and private label industries. I imagine these sectors will continue to serve the company well.
Using a discounted cash flow model, 3i Group is estimated to be trading at 55.3% below fair value. This is evident in its price-to-earnings (P/E) ratio, which is only 5.3 times. This is markedly lower than its peers in the same industry, which average an 11.9 times P/E ratio.
Overall, I wouldn’t expect the 3i Group share price to fall significantly in the coming years. Even if growth slows in the short term, I would value these as high-quality shares with good long-term potential.
