3i Infrastructure, a leading investment company and private equity firm that invests mainly in Europe and Asia, has posted a strong performance on the London Stock Exchange (LSE) this year. Starting the year at a price of 1340p, 3i was trading at 2414p at time of writing – an appreciation of over 80%. But what explains this substantial strengthening, particularly at a time when macroeconomic pressures and high interest rates have made the investment landscape tough for many of 3i’s competitors?
One reason why investors appear to be drawn to 3i stock is that the firm has posted resilient revenues. The FTSE100 firm reported in November that its total returns for the first half of the year stood at £1.67 billion, which is only down 5% from the previous year and still represents a 10% return on opening shareholders’ funds.
Minimal declines are all the more impressive when you consider the bleak picture for the broader private equity space. In October, S&P Global reported that global private equity and venture capital deal value slipped by over 22% in September compared to the same month in 2022. The fact that 3i has managed largely to avoid such steep losses could therefore point to the robustness of its business model and the long-term opportunities that exist for investors.
3i’s strong performance has largely been driven by the performance of its portfolio company Action, a discount food store operating across Benelux. Action’s turnover surpassed €1 billion for the first time last year, posting 168% growth between 2015 and 2022. Amidst high levels of inflation across the Eurozone and growing cost of living pressures, it seems that Action’s central philosophy of keeping prices as low as possible has driven higher customer acquisition and higher revenues.
RBC Capital Markets recently gave 3i an “outperform” rating and gave the stock a target price of 2550. “A significant proportion of this has been driven by Action, and we don’t foresee a change near-term,” RBC said. “We expect growth in the discount segment plus a strong and proven store expansion strategy to drive multi-year growth for Action […] we still see good value in 3i at current levels, given its growth and strong balance sheet, differentiated long-term strategy and defensive asset allocation. Hence, we initiate at outperform.”
There could be scope for 3i to post strong revenues next year – something that could feed into a stronger stock price. After all, while the performance of Action ensured decent returns for 3i shareholders, several of the firm’s portfolio companies were “exposed to discretionary consumer spending and cyclical end-markets” and therefore saw weaker performances.
Should interest rates come down globally as is expected next year, this should help encourage greater levels of consumer spending and potentially boost the revenues of companies exposed to discretionary spending. 3i’s share price could be the beneficiary and continue to make gains after a strong 2023.
Author: Harry Clynch
