Investing.com -- Shares of 3i (LON:III) Group fell more than 4% following its latest trading update, as market concerns over softer-than-expected like-for-like sales overshadowed otherwise strong overall growth.
The company’s key asset, Action (WA:ACT), reported a 17% year-over-year increase in total sales, reaching €2.95 billion in the first 11 weeks of the quarter.
However, LFL growth came in at 6.1%, below expectations, due to temporary availability issues following an ERP system changeover.
While the company has assured that these problems have been resolved, investors appear to be reacting to the immediate impact rather than the long-term outlook.
RBC Capital Markets projects that first-quarter sales will total approximately €3.6 billion, marking a 19% rise from the same period last year. The discount retailer has expanded its footprint, opening 38 new stores so far this year.
The company confirmed that Action’s availability issues were temporary and attributed some of the sales performance variation to one fewer trading day compared to last year due to the leap year in 2024, as well as the later timing of Easter.
Despite these factors, Action maintained stable guidance, with expectations for LFL sales growth in the mid to high single-digit range for the full year. RBC Capital Markets estimates an 8% increase year-over-year.
Action also completed a repricing of approximately 53% of its debt facilities, reducing its annual interest expenses by around €19 million, building on the €14 million in savings achieved through a similar move last November.
As of March 16, the retailer held €927 million in cash and equivalents and is set to distribute another dividend to shareholders by the end of the month.
The company has raised its estimate for store expansion potential within its existing European markets.
The updated figure of 4,850 potential store locations marks an increase of about 500 compared to last year’s estimate. For the full year, Action aims to add approximately 370 net new stores, aligning with RBC’s forecast of 365.
Beyond Action, 3i’s wider private equity portfolio showed resilience against a challenging macroeconomic environment. Royal Sanders, a long-term holding within 3i’s portfolio, continues to deliver strong results.
RBC Capital Markets views 3i as a solid performer in the financial sector, with a track record of delivering strong returns.
However, given the size of its stake in Action, the retailer remains a crucial driver of overall performance.
While Action is recognized as a high-quality operator with long-term growth potential, its near-term upside appears more constrained compared to other European retail peers.
The stock was recently trading at a more than 40% premium to RBC’s fiscal year 2025 estimated net asset value, surpassing its historical average of approximately 23%.
This premium reflects the market’s confidence in Action’s fundamentals, implying a 34x calendar year 2025 price-to-earnings multiple.
RBC considers this valuation fair for a well-managed business but notes that near-term growth prospects may be more limited than those of other companies in the sector.