3i Group (LSE:III) was the worst-performing FTSE 100 stock by a country mile today (14 May). As I type, it’s down 12% to £20.50 per share, putting the year-to-date decline at 33%.
Now, I opened a smallish starter position in this investment trust recently. And because I build out my holdings over time, I actually prefer the share price to fall while I’m doing this.
Because as Warren Buffett once pointed out: “Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
The exception to this is if the business runs into serious trouble. With the stock crashing today, is that what’s happening with 3i?
A strong year
3i Group was founded in 1945 to help rebuild Britain after the Second World War. It specialises in private equity and infrastructure, often taking controlling stakes in mid-sized companies then helping them grow through buy-and-build strategies and international expansion.
Today, the company released its results for the year to 31 March. At first glance, they looked strong, with net asset value (NAV) per share increasing to 3,030p from 2,542p a year earlier.
Net assets surpassed £30bn, driven by growth at Dutch discount retailer Action and Royal Sanders, a leading European contract manufacturing producer of personal care products.
Elsewhere, 3i saw “a number of standout performers” across the portfolio. Indeed, the firm harvested £1.9bn of cash proceeds from it last year.
And the £20bn trust is in a strong financial position, with liquidity of £1.86bn and net debt of £547m. Gearing was low at just 2%.
Why’s the stock crashing then?
The problem is that 3i’s portfolio is dominated by Action, which is a cross between B&M and Home Bargains. It’s the sort of place you pop in for shampoo and leave with a new toaster and garden gnome.
The retailer’s previously torrid pace of growth has been slowing across Europe. Like-for-like (LFL) sales dropped to 2.4% in the first 19 weeks, down from 6.8% last year. LFL sales were flat in France, its largest market, and Germany.
Management put this down to consumer caution, recent cooler weather, tough comparables, and seasonal product categories that underperformed. Inflation, driven by the unresolved Iran conflict, is adding to near-term uncertainty.
However, 3i is very confident in the retailer’s future. CEO Simon Borrows said:
[Action’s] growth story is underpinned by the combination of a powerful, multi-year, store roll-out programme into significant white space potential and compounding in LFL sales growth, with some of the best store economics we have seen in a retail concept.
Is this the best value stock?
3i has been applying quite an aggressive 18.5 times enterprise value-to-EBITDA (earnings before interest, tax, depreciation, and amortisation) multiple for Action. This implies a near-30% NAV discount.
Even accepting a lower multiple to account for slowing growth, there still seems to be a margin of safety here. There’s also a 3.9% dividend yield.
On top of this, 3i has announced a £750m share buyback programme to be completed before the end of the year. Directors have also been snapping up the stock recently.
While this might not prove to be the FTSE 100’s best value share, it’s one of them, in my opinion. So I’ll be adding to my 3i position soon.
