Dutch discount retailer Action is continuing to drive 3i Group (III ) to new highs as its appeal to cash-strapped shoppers keeps the top-performing investment company ahead of analyst expectations.

3i has reported an 8% increase in net asset value (NAV) to £20.34 per share in its third quarter, which covers the three months to 31 December, contributing to an 18% portfolio return over nine months.

Currency movements deducted 16p from the investment gain, but this was more than offset by strong results from Action, which accounts for nearly two-thirds of the private equity giant’s asset value.

Net sales from the Dutch company rose 11.4% in the three months and while that was significantly lower than a year ago when turnover jumped 23.4% in the quarter, 2023 was still a solid year with 16.7% sales growth compared with 18.1% in 2022.

Simon Borrows, 3i chief executive and Action chair, said: ‘Action has again produced an all-round, impressive set of results and has started 2024 with good momentum across all of its markets.’

He said transaction volumes had accounted for 89% of the like-for-like sales increase after Action cut the prices of 2,500 products in the second half, widening the gap between it and competitors.

With an unchanged earnings multiple of 18.5 times, 3i’s 54.8% stake in Action rose £900m in the last quarter, from £12.9bn in September to £13.8bn at the end of the year. 

This is a similar rise to the increase in 3i’s overall NAV during the quarter, underlying Action’s crucial role in its performance. 3i’s NAV finished the year at £21.1bn, up from £20.3bn in September, giving Action a dominant 61% position in the portfolio.

Thanks to its growth the retailer paid 3i £189m worth of dividends in December.

Analysts had predicted growth at Action would slow, and while it did moderate this was ‘much less than anticipated,’ said Liberum analyst Joachim Klement.

Red Sea disruption

The situation in the Red Sea poses a risk for the retailer’s future growth and 3i said it had spoken to Action about this and the company is ‘carefully monitoring’ the situation and ‘working with its freight partners to ensure disruption is minimised’.

‘Freight costs in the short term may be higher due to surcharges but, provided the situation does not escalate, the impact on profitability can be managed,’ the FTSE 100 company said.

Meanwhile, 3i successfully completed the refinancing for European personal care producer Royal Sanders, creating proceeds of £109m, giving the company a strong balance sheet of £666m in cash, an undrawn credit facility of £900m and gearing of 3% at the end of 2023.

All this has aided 3i shares, which returned 85% to shareholders last year, making it the best-performing investment company in 2023. Excitement over Action had by yesterday pushed 3i shares to 31% over NAV per share, up from a 12.5% premium in September. 

Today’s news prompted some profit taking and the shares fell 2.5% to £24.16. Against the new higher NAV, this reduced the premium to 19%.

‘We were completely off the mark when we said that the premium to NAV had little room to grow,’ said Klement. While the current share price is ‘high’ given the point in the cycle and decline in growth from Action, in a longer-term context the premium is ‘hardly above the average of the last 10 years’.

‘Could it be that 3i is not subject to the same gravity as other private equity funds given the resilience of Action? It increasingly looks like that could be the case,’ he said.

However, Deutsche Numis analyst Kim Bergoe disagreed, cutting her recommendation from ‘buy’ to ‘hold’, but lifting the target price to £26.47 from £23.74.

‘While we do expect Action to continue to perform strongly, driving continued Ebitda [underlying earnings] growth and cash generation, we note that the general economic, geopolitical and political backdrop results in challenging conditions across much of the portfolio,’ she said.