Action: A 3i Group Success Story

Investing, Holding and Compounding.

A brief update on 3i’s 2025 Annual Results, published on 15 May 2025. While the market open was weaker than expected, reaching a low of 3,848 (down nearly 8%). The stock closed with a more moderate decline of 4.2%. All fundamentals outlined in this note remain relevant to the long-term story, and I remain confident in the upside potential of 3i Group.

Long story short, Action report LFL sales growth of 6.8% YoY for the first 19-week period, below street estimates of 7.2%. This weaker performance, coupled with foreign exchange losses, ultimately led to a lower-than-expected NAV per share for FY25. Nevertheless, our model continues to project 8.5% LFL sales growth for the full year 2025.

While these figures initially caused the stock to dip at the open on May 15, by midday on May 27, it had resumed its upward trend, trading at 4,153.

One notable highlight is that the two newly opened stores in Switzerland ranked among the top 10 best-performing stores in their first year of operation. According to management, this strong performance is attributed to the absence of hard discounters in the region.

Additionally, Royal Sanders has seen a 50% increase in its valuation. We view this investment as a potential growth driver that could help support 3i’s overall valuation.

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This is my first note published on Substack. The aim is to provide financial insights and fundamental analysis on companies I believe are worth paying attention to. I've also shared a brief introduction about my background and what motivated me to start writing. Thank you for reading, any comments or feedback are truly appreciated, I genuinely encourage you to share your thoughts!

Executive Summary

Company : 3i Group PLC (Ticker : III)

Industry : Financials (but it could be Consumer Staples at this point)

Country HQ : UK

Market Capitalisation : £40bn

52-week range (in GBXp) : 2,751 - 4,153

Price target (p) : 4,475 (14.6% upside)

Next Financial Event : 15th May, 2025 - FY 2025 Results

3i Group is an international investment firm focused on Private Equity and Infrastructure investments. It is most famously known as the major shareholder of Action. However, 3i's Group valuation is often considered stretched for two reasons. First, the high multiple applied to Action's EBITDA when assessing its valuation, and second, the P/NAV multiple that the market applies to 3i. In this note, we aim to explore why this valuation could be considered fair, and how potential upside may still come from NAV expansion rather than multiple re-rating. A key factor lies in 3i’s majority stake in Action, whose strategy, competitive advantages, and future growth potential we will examine in detail.

For the sake of this note, please bear in mind that : 3i Group reports its fiscal year ending on March 31st, Action reports its fiscal year ending on December 31st, and all prices are as of April 14th.

3i's Backstory

3i Group was originally founded under the name Industrial and Commercial Finance Corporation (ICFC) by the Bank of England with an initial capital of £15m (million) to help rebuild Britain after WWII by providing capital to small and growing companies in the UK. But it wasn't until 1983 that ICFC was renamed Investors In Industry, yes, that’s where the "3i" comes from. By 1987, the Bank of England had sold its stake in 3i, transforming it into a public limited company, which was later listed on the London Stock Exchange as 3I Group PLC with an initial market capitalization of £1.5bn (billion).

3i started to expand a network of offices in Europe, Asia and North America, as well as raising its first third-party fund in 1994. Over the following decade, the Private Equity firm invested its balance sheet and third-party funds in increasingly larger deals through a combination of buyouts and infrastructure investing. When Lehman Brothers collapsed, 3i found itself in a position where there was too much debt both in the holding company and in the investee companies. In fact, over the past decade, they have adopted a pro-cyclical investment approach by raising debt and acquiring companies during market peaks, often at inflated valuations. This behaviour was largely driven by investor pressure to reduce dry powder and deploy capital quickly, even when market conditions were unfavourable. The mark-down of investments and the leverage impact of the debt caused the Net Asset Value (NAV) to halve. To save the company, management decided to undertake a highly dilutive 9-for-7 rights issue in 2009, which raised £700m. While the equity raise helped the company recover from its difficult position at the expense of its shareholders, it was the arrival of the current CEO, Simon Borrows, in 2011 that marked the turnaround.

The reason we walked through 3i’s backstory is because it explains why the new CEO made some bold changes. In short, he said: “No more fundraising, we’ll invest our own balance sheet, Berkshire Hathaway style, to go after higher returns.” (Not his exact words, but you get the idea.) Before this shift, 3i was mainly investing third-party money and only earning a carried interest, say around 20% of the upside on those investments.

This new strategy prevented them from repeating the mistakes they made before the GFC, which during downturns, would get back at them. Instead they would prioritize the best deals and make the most of their own balance sheet. Considering they gave up the pressure of investing third-party money, which naturally creates burden to exit invested companies in order to return money to LPs, they were able to afford much longer-term investments and enjoy the benefits of compounding…as seen with a famous Dutch-based hard-discounter, for instance.

The Portfolio

Private Equity

3i's Private Equity portfolio is invested in mid-market companies with an enterprise value in the range of €100m to €500m headquartered in both Europe and North America. These companies span various sectors, with the following distribution: Value-for-money and Private Label, Healthcare, Industrial Technology, Online Retail & Travel and Services & Software companies. As of 31 March 2024, these sectors account for 72%, 6%, 5%, 5% and 3%, respectively. The remaining 9% consists of the Infrastructure portfolio and Scandlines. It is important to note that, out of solely the £19,629m Private Equity portfolio, Action represents 72% of the carrying value (£14,158m as of 31 March 2024).

Below is a breakdown of their total portfolio with some of their main investments :

Action

Brothers Gerard and Boris Deen, with the help of their friend Rob Wagemaker, opened their first 60m² Action store in 1993 in Enkhuizen, Netherlands, supplied by a small storage unit. From the beginning, Action's strategy has been to buy surplus stock from brands and offer these discounted products to customers. Seeing the success of their strategy, they opened their first 25,000m² Distribution Center (DC) in Zwaagdijk-Oost, Netherlands (pronounced "zvah-dyke-ohst") in 1999. By 2010, following the opening of over 200 stores across the Benelux region, their first DC had to be expanded to 100,000m².

On July 30th 2011, 3i published a press release announcing the acquisition of a major stake in Action, becoming the partial owner of more than 250 stores in Benelux and Germany, as well as becoming the indirect employer of 7,000 employees. From the words of Ronald van der Mark (Action’s CEO at the time): "Action operates an impressive retail formula with a highly affordable and surprising product range that always manages to exceed customers' expectations (…) together (with 3i), we will be able to respond to opportunities and developments in the growing and consolidating European market" … and so they did.

Because Action is the same everywhere – one brand, one store experience, and one operating model across all countries where it operates – it allows the discounter to expand its footprint rapidly across Europe. As of March 2025, Action has opened a total of 2,955 stores in 12 European countries (including France, Germany, the Netherlands, Poland, and Belgium). Action employs over 79,000 people to serve more than 18 million consumers who visit their stores every week. These stores are supplied by 15 distribution centres and 3 hubs.

One actor in this incredible growth is the current CEO, Hajir Hajji, who has been in office since 2021 but joined Action back in 1997.

Other PE investments

Besides Action, 3i has a long history of developing its private portfolio with companies positioned to benefit from scalability. One standout, value-for-money investment has been the well-known fitness brand Basic-Fit.

In November 2013, 3i invested €110m in the company, based on an enterprise value of €275m. They realized part of their gains in 2016 when Basic-Fit completed its €820m IPO on the Amsterdam Stock Exchange. The following table is a summary of 3i's main investments and divestments in Basic-Fit :

* pardon me, below graph circle is slightly too high

** 3i invested £17m at €25 per share, but did not participate in the broader equity raise, which diluted their holding to 11.6%.

We are not going through all these figures just to overwhelm you with numbers, but in an attempt to show you when they sold and invested on this graph below :

While no one could have predicted a global pandemic in 2020, which massively impacted their business, Basic-Fit significantly benefited from the post-COVID era, driven by an increased focus on health and well-being. Even though the stock price typically drops when a major stakeholder sells its shares, we have to admit, they know when to sell.

It is also worth noting that 3i hasn't incurred any major investment losses since Simon Borrows implemented the new strategy. That said, as of 2024, they do hold a few assets that are losing momentum, which are offset by stronger performing ones. Although, it’s worth keeping in mind that out of the roughly 30 portfolio companies 3i is invested in, Action alone represents 72% of the total Private Equity portfolio value.

Let’s now take a closer look at two other investments that are particularly relevant to 3i’s future at the time of writing this note:

• Cirtec Medical (~3% of the PE portfolio, 3i invested £136m in 2017 and now valued at £586m) is a medical device outsourcing company that develops and manufactures advanced equipments such as implantable pulse generators, pacemakers, implantable drug delivery systems, steerable catheters, and Stereax micro batteries… Through Cirtec, 3i is strategically positioned to address challenges related to an ageing population. The medical device outsourcing market is expected to grow at a CAGR in the high single digit over the next five years, and Cirtec is well positioned to grow at a rate above the market average. As of 2024, Cirtec has completed nine bolt-on acquisitions since 3i’s initial investment in 2017 and has a strong pipeline that should support future growth.

• Royal Sanders (~3% of the PE portfolio, 3i invested £135m in 2018 and now valued at £580m) is a European manufacturer specialising in private label and contract manufacturing of personal care products, such as shampoos, body lotions, and hand washes. 3i has designated Royal Sanders as a strategic long-term hold asset due to its consistent organic growth and acquisition performance. The criteria 3i imposes for an asset to be classified as a long-term hold are an EBITDA of over 100m and consistent growth at a rate of over 15%. Royal Sanders being a platform business, 3i is well-positioned to leverage its expertise and lessons learned from Action to drive strong scalability, enter new markets, and pursue additional accretive bolt-on transactions.

Infrastructure

Besides private equity investments, 3i also holds a c.29% stake in the listed equity 3i Infrastructure (ticker: 3iN). 3iN is a fund focused on infrastructure investments in developed markets, particularly in communications, energy, social infrastructure, transportation & logistics, and utilities in the UK and Europe.

The strategy and objectives of 3iN, as stated, are to "maintain a balanced portfolio of infrastructure investments delivering a mix of income yield and capital appreciation to provide shareholders with a total return of 8% to 10% per annum over the medium term, while distributing a progressive annual dividend per share". As of September 2024, their portfolio has 12 investments, valued at £4bn. They have a strong track record, with an 18% asset IRR since inception in 2007.

Although 3i aims to expand further its infrastructure reach by establishing funds investing in the US, its infrastructure portfolio already offers steady and reliable dividend payments, helping to diversify from its private equity investments. As of march 2024, 3i's stake in 3iN is valued at £879m, or 4% of its total portfolio value.

Scandlines

Another form of diversification for 3i is its stake in Scandlines. After taking the company private in 2007 and acquiring Allianz’s remaining 49% stake in 2013, 3i sold 65% of its holding in 2018 to two other infrastructure funds. Scandlines is a ferry operator running routes between Denmark and Germany. The company operates a fleet of seven ferries, six of which are hybrid-powered (combining multiple energy sources) making it the owner of the world’s largest hybrid ferry fleet. Scandlines’ revenue is primarily driven by leisure travel and freight transport volumes. Like 3i Infrastructure (3iN), it is designed to generate consistent cash flows for 3i while contributing to the diversification of its asset base. As of march 2024, 3i's stake in Scandlines is valued at £519m, or 2.3% of its total portfolio value.

Finally, as 3i states, their infrastructure investments income is primarily designed to cover operating costs, thereby minimizing the dilution of capital returns.

To sum up and provide an overview, here is a breakdown of 3i's total investment portfolio as of March 2024:

Action, 3i's Love Story

3i had the foresight to initially invest in the Dutch hard discounter business in 2011 for £134m taking up to 45% of the Action's equity at a 8.3x EBITDA multiple. For the following 8 years post-acquisitions, 3i has passed multiple milestones and identified the key triggers to capitalize on Action's tremendous growth potential, notably by expanding Action's operations beyond the Benelux borders. Due to its extraordinary growth, Action has achieved a CAGR of 25.5% in Net Sales and 27.8% in Operating EBITDA from 2011 to 2024, demonstrating consistency, resilience, and, more importantly, scale benefits, which will be discussed in more depth later.

To understand to what extent Action has grown, it is relevant to compare some figures to its peers since 2019. Action has achieved like-for-like (LFL) sales growth of 11% (vs. 5% for peers), opened 13% more stores (vs. 8% for peers), and experienced net sales and EBITDA growth of 22% and 31% (vs. peers at 11% and 10%, respectively). As these numbers show, while competitors have had lower growth during this period, they have also suffered from narrowing margins, in contrast to Action.

Management is proud to highlight their strategy of consistently providing the lowest prices, expanding their footprint, and hiring the best colleagues to run operations. However, while this is a message we hear across the entire industry, the purpose of this note is to understand why Action is performing significantly better than its peers. One of the reasons must be coming from their last key driver contributing to their growth : a flexible offering of daily necessities.

And to dive into this key driver, what is better than a well-aligned slide from 3i’s Capital Markets Day of Action, worth more than a dozen lines of text…

(Source : 3i's 2025 Action CMD presentation)

..though, I must write a few words about this. We must highlight some key information that clearly depicts Action's strategic position in the hard-discounting industry. The company offers a total of 14 categories, totalling 6,000 SKUs (items), with the vast majority of them being non-perishable products (take that Lidl). It is also worth noting that two-thirds of the assortment on the shelves are variable and change to adapt to consumer needs. Adding to this recipe and linked to their slogan "Small prices, big smiles", two-thirds of products are sold at a price below €2. It is relevant to highlight this data, as it forms the core of Action's strategy and will be important to assess the future growth of Action in the discounter landscape.

As management likes to describe it in their multiple appearances, Action isn’t just your typical retail store. Customers don’t necessarily visit Action with a specific product in mind, they go for the thrill of a treasure hunt, searching for great deals. This is the essence of what management calls the “flexible offering of daily necessities.” Even if a customer walks in with one item in mind, that product often ends up being just a pretext for filling an entire basket.

Action's strength lies in its strategy. While many of these practices are common in the retail industry, Action leverages its focus on non-perishable products to benefit from them :

• Big volume purchases : as Action has been operating for a couple decades now, they have created strong relationship with suppliers who deliver goods rapidly and with an expertise regarding the legislation of each country items are being shipped. Because Action mainly sells non-perishable products, it's easy for them to hold excess inventory if they ever overestimate purchase volumes, rather than cutting into their margins by offering discounts. Also, because the quantity of the product sold is often greater than what you'd find at competitors, it allows them to purchase from suppliers at a lower price (e.g., the margin they can make by reselling 2.5L bottles of detergent is much higher than what competitors would earn from selling 1.5L bottles).

• No fixed assortment : while only one-third of their product offering is fixed, to attract customers with that one item they’re specifically looking for, they manage to create additional demand through a wide range of daily necessities (e.g., discounted iPhone chargers). They’re also known for anticipating customer trends by sourcing niche products that gain traction on social media, products that only Temu might offer, for instance.

• No high street location : Action plans no developments in the UK for now as the cost of operating a store is too high for their standards. They wisely pick location on the outskirts of large cities in vast commercial areas where the costs of operating a store is the lowest.

• Efficient logistics : Action is recognized as a pioneer in the way it efficiently manages its distribution centres and logistics hubs. While one might initially assume this is standard practice across the retail industry, in reality, not all retailers apply such methods. Leveraging AI and other technological advancements, Action has taken a significant step forward in streamlining its logistics, receiving goods from suppliers and delivering them to stores more quickly, all while requiring fewer employees on-site. Additionally, Action successfully completed the implementation of its new ERP system at the end of 2024, replacing the one that had been in use since 2006.

• Low overhead costs : speaking of fewer employees, while Zara, for example, requires staff to regularly change the store layout, Action sometimes receives full pallets of products already organized, so they don’t need to spend time placing individual items on the shelves. Additionally, Action stores are standardized, featuring almost identical floor layouts, walls, and shelves, which helps reduce both the time and costs associated with store development. Finally, because they sell products in multiple European countries, their packaging is standardized across all markets, featuring the required disclaimers and instructions in all languages.

• Low marketing expenditures : mostly low cost strategy with catalogues and online marketing presenting some of the 150 new products added every week to attract customers.

Two words to sum this all up : standardisation and scalability.

This standardization allows Action to rapidly expand its store footprint. With 37 stores already opened in Europe in Q1 2025, Action is well on track to meet its goal of opening between 1,300 and 1,400 new stores between 2023 and 2026.

Each couple of years, Action increases its total addressable market. As of their CMD in March 2025, Action estimates a potential total of 4,850 stores in Europe (up from the 4,400 estimated at the 2023 CMD), driven primarily by increased sales growth per store in existing country, as well as their plan to enter new markets like Romania and Switzerland in 2025.

(Source : 3i's 2025 Action CMD presentation)

Based on their assumptions and their consistently impressive yet conservative guidance for store openings, we can expect strong store growth in Europe before considering expansion into the U.S. market (where Action could potentially benefit from the gap between dollar stores and large retail actors such as Walmart and Target). We could attempt to estimate a steady-state number of stores that can be opened in a given country before cannibalising existing ones. However, this would require detailed knowledge of competitor store development in each country, as well as assumptions about store density per million inhabitants (e.g. the Benelux region has 21.7 Action stores per million inhabitants, compared to 12.63 in France and 2.41 in Italy). To ensure greater accuracy, we’ll prefer to rely on Action’s own forecasts for potential store deployment. As we’ll see in the valuation section of this note, each country has shown different sales growth over the past two years. For example, Action recorded a 60% sales increase in Poland compared to 26.8% in France between 2022 and 2024. This can help us in our approach to modelling LFL sales growth, particularly by identifying which countries offer the most potential for future store openings, hence driving sales growth.

Back to our store openings, the standardization of processes also helps reduce the cost of opening each store. Action highlights the impressive fact that it can achieve a payback period of less than one year on a new store CapEx (Capital Expenditures). Also, Action operates with negative working capital, thanks to its rapid turnover of inventory, meaning it does not need external funding to expand its store base. It is also worth noting that Action claims that as of March 2025, all stores opened before January 2023 are profitable and fully operating

(Source : 3i's 2025 Action CMD presentation)

Another important point is to assess Action's clientele. One might have assumed that Action primarily attracts low-income customers due to their low price offerings, but customer panels paint a different picture. Action has successfully drawn a highly diversified customer base in terms of age, education, and income.

(Source : 3i's 2025 Action CMD presentation)

In terms of the competitive landscape of the hard-discounting industry, Action has opened around 860 stores in France out of their 2,918 European stores, it is interesting to understand what has enabled such strong penetration in the French market, which was already shared with competitors. Being French myself, I'll focus on this market.

Action's main large-scale competitor in non-perishable products is Tedi, a German retailer with over 3,500 stores across 15 European countries. Tedi is a strong competitor; although they only opened their first store in France in 2023. They offer a similar range of products to Action, but their stores are usually larger. It is common to see Tedi stores opening near Action locations, benefiting from low-cost locations. While customers typically visit both stores, this could impact Action’s transaction volume if Tedi continues to expand. However, Tedi’s launch in France has not been well-received, with customer reviews online expressing disappointment over the promise that most items would be priced at €1, when in fact only a few are.

These photos were all taken on a Friday around 6 p.m. While Tedi’s store was larger, better organized, and offered a wider product range, it had hardly any customers at the time. In contrast, Action had lines at all three checkout counters, despite the two stores being only about 500 meters apart.

Other well-established brands are present in France, but they are struggling due to fierce competition from the hard-discount sector:

• Gifi: Recently, Gifi announced the closure of 11 stores in France due to issues with inventory logistics, which prevented them from paying suppliers. These problems resulted from a disastrously implemented IT system change. Furthermore, Gifi is facing increased competition from the growth of Action and Temu in France. Gifi’s revenues in France in 2024 were around €1.2bn, less than half of Action’s.

• Stokomani: Stokomani has also been impacted by the growth of Action, admitting in early 2025 that they have been struggling financially.

Competitors also include destocking stores like Normal (Danish) and Noz (French), which are thriving in France but do not follow quite the same strategy as Action, being solely "destockers". Despite this context, Action expects to open c.40% more stores in the country in the next decade.

In the hard-discount industry, brand reputation is key and Action has definitely managed to win over the French customer. According to EY Parthenon’s annual reporting of the evolution of the top 10 favourite brands among the French since 2020. Action has successfully reached the top of the list and managed to maintained its position, only eight years after opening its first stores in 2012.

(Sources : EYParthenon website)

Although France may not always be directly comparable to other European countries, one might wonder why Action seems to be a significant challenge for other discounters. Beside reputation, it again comes does to the prices Action is able to offer on its products, thanks to their strategy of standardization and scalability, as described above. Action consistently manages to beat competitors on price, and they do so across all of Europe. While we must consider the positively biased view of each word and graph communicated by the company, the numbers are still quite revealing.

(Source : 3i's 2025 Action CMD presentation, 1) refers to the "measure of 1,500 – 2,000 comparable products across the assortment in each country at competitors.")

Valuation And Model

Now that we’ve covered some of the most relevant information about Action, it’s time to walk through the assumptions regarding Action and the rest of the portfolio, and how these are reflected in the overall valuation of 3i Group. 3i being an investment firm should not be valued through a DCF, we must use other method such as Price/NAV by applying a multiple linked to historical valuation as well as comparable investment firms.

Digging into their financial statements, and since our focus is on 3i’s 2025 and 2026 NAV, we figured it requires fewer assumptions to forecast the year-on-year change in Equity rather than trying to predict fluctuations in Assets and Liabilities. We take here the bias that Net Asset Value = Assets - Liabilities = Equity

This is especially true because changes in Equity are primarily driven by two key and relatively forecastable items: profit for the year and dividend payments to shareholders. While a third important factor is the impact of foreign exchange movements on investments which affects the profits, this is more difficult to predict, particularly given the volatility seen in recent years and the anticipated currency market shifts potentially triggered by the Trump administration’s policies. Hence, we will focus wisely on what can be reasonably forecasted.

As we’ve seen throughout this analysis, estimating 3i’s profit for one year largely depends on valuing Action. In 2024, unrealised profits from Action accounted for 87% of 3i’s Gross Investment Return (GIR), compared to an average of 63% between 2021 and 2023. Given Action’s continued growth and our assumptions, we model that it will contribute an average of 80% to 3i’s GIR going forward.

Action's model

For Action’s 2026 valuation, we have made several assumptions to estimate its year-on-year change in fair value. These will be detailed after the summary table presenting our forecasts for Action up to 2030 :

New stores : As Action consistently opens new stores and continues to identify attractive markets for expansion, their growth momentum remains strong. Recalling their guidance to open 1,300 to 1,400 stores between 2023 and 2026, nearly 700 stores have already been opened in the first nine quarters of this period. Given the initial estimate of 4,400 potential store locations in 2023, recently revised upward to 4,850, it would be overly conservative to assume they won’t meet or exceed this target. Assuming a 10% annual increase in white space, store openings could potentially reach 1,450 to 1,500 by 2026, representing a ~7% beat on guidance for the upper end of the range. It’s also important to note that Action’s store openings are highly seasonal, with nearly 70% occurring in the second half of each year and over 40% concentrated in Q4. Action has guided for approximately 370 new store openings in 2025. Based on those assumptions, we are targeting the lower end of the range, with around 1,450 new stores expected to open over the 2023–2026 period, 380 in 2025 and 415 in 2026. This represents year-on-year growth of 13% and 12.6%, respectively, slightly below the four-year historical average of 14.2%. This forecast is further supported by Action’s track record of exceeding its store opening guidance.

Net sales : 3i reports Action's LFL sales growth each year, but does not always disclose the specific contributions of volume and price. However, for 2023 and 2024, Action’s LFL sales growth was 16.7% and 10.3%, respectively. Of this, volume contributed 14.9% and price 1.8% in 2023, while in 2024, volume contributed 10.5% and price had a slight negative impact at -0.2%. It is important to note that volume is what truly matters for hard-discounters, as long as price does not impact too negatively the growth. For the first 11 weeks of 2025, Action reported a LFL sales growth of 6.1% (with volumes contributing to 6.5%) and guided for full-year LFL growth in the mid to high single digit range. Based on this, we assume an 8.5% LFL sales growth for the year, primarily driven by increased transaction volume. Applying this 8.5% growth to the previous year’s net sales results in total sales attributable to mature stores of approximately €14.9bn without taking in account stores recently opened still operating their sales ramp-up. This assumption aligns with Action’s communication of average annual sales per store of €4.7m from 2020 to 2023.

However, we also need to take into account the sales generated by stores in ramp-up. Action considers a store to be relatively mature on average after one year of operation. Therefore, we shouldn’t assume that a store contributes 100% of its potential from the moment it opens. In the retail industry, it is common to apply a ramp-up profile for sales per store, such as:

• Q1: 50%

• Q2: 80%

• Q3: 90%

• Q4: 100%

This implies that depending on when a store opens during the year and factoring in the known seasonality of store openings, they should generate net sales of approximately 1.3bn in 2025. This adds up to an estimated net sales for Action of €16.2bn, representing a 17.2% increase in net sales year-on-year (less than the historical 4 years average of 25%)

LTM Run rate EBITDA through quarter analysis : 3i Group reports its full-year 2025 results in Q1 2025, while Action’s financial year ends in December. It is therefore logical to align with 3i’s approach by forecasting a last twelve months (LTM) run-rate EBITDA for Action as of Q1 2025, i.e. EBITDA generated by Action between April 2024 and March 2025.

While Action has already disclosed EBITDA figures for Q2 to Q4 2024, totalling £1,679m, only Q1 2025 remains to be estimated. Based on a set of detailed assumptions explained below, I arrive at an LTM run-rate EBITDA of approximately £2,239m , and £474m for Q1 2025. To support these assumptions, we have compiled net sales and operating EBITDA data per quarter from 2020 onward.

A few key observations emerge:

• As there is the seasonality for the store openings, net sales are also seasonal, with Q1 typically accounting for c.20% of annual net sales, while Q4 accounts for c. 30%.

• This seasonality is also reflected in EBITDA margins. Action reported an operating EBITDA margin of 15.1% for 2024 and has guided for a margin expansion of 10 to 20 basis points in 2025. However, it’s important to note that margins are typically lower in Q1 compared to Q4 (historically around 13.4% versus 17.5%, respectively).

Finally, Action has guided for a 10 to 20 basis point (bps) EBITDA margin expansion in 2025, from the reported 15.1% margin in 2024. Our assumption targets the midpoint of the range, at 15 bps.

EV/EBITDA multiple applied to Action's : 3i has been using an EV/EBITDA multiple of 18.5x since 2021 to value Action’s Enterprise Value (EV). This multiple includes a discount of approximately 5% from 19.5x to account for liquidity considerations. While this multiple is higher than those of listed peers in Europe, it reflects several factors: Action’s consistent historical and projected growth, its focus on non-food products, and its distinct positioning compared to large distributors, which are typically valued at lower EV/EBITDA multiples in Europe. Also, because Action's business is considered inflation protected, it reduces the risks of negative impacts in times of economic downturn.

Below is a comparison of EV/EBITDA multiples for peers in North America and Europe :

A quick word on this table: the "Ratio" column is calculated by dividing the EV/EBITDA multiple by the EBITDA growth rate. While a PEG ratio would typically be more appropriate, this calculation still gives a sense of relative valuation compared to peers, while also factoring in EBITDA growth. We can clearly see that Action appears fairly valued at an 18.5x EBITDA multiple.

But if the question still remains whether Action should be assigned a lower multiple due to its size, implying greater risk or, conversely, whether its size represents an opportunity, offering a longer runway for growth in the years ahead. In our model, we choose to follow a 18.5x multiple which gives Action a valuation at a forward EV/EBITDA multiple of 14.6x in 2024 and 15.6x in 2025. As for other Private Equity firms owner of Action, they rely on 3i's valuation of Action to increase or decrease their equity stake, meaning their is an accepted consensus in the valuation multiple applied to Action's EBITDA.

Once we have projected our EV over the next years, we get the Equity Value of 3i by removing the Net Debt (ND). Action has historically had a ND/LTM run-rate EBITDA of 1.7x, 2x and 2.6x in 2022 through 2024. Taking into account the large cash generation from Action and their historical average operating cash flow conversion from operating EBITDA of c.90%, I modelled a repayment of the debt to reach a c.2.2x ND/LTM run-rate EBITDA by 2030.

The equity value (in euros, as we are discussing Action) is then converted into GBP and multiplied by 3i’s ownership stake. 3i has been consistently increasing its stake in Action each year. This not only serves as a strong signal to the market but also results in 3i’s shareholders owning a growing share of Action’s operations and profits. Since 2020, they increased they stake in action from 52.9% to 57.9% in 2024.

In our model, we expect 3i to continue increasing its stake in Action by reinvesting cash generated through realisation and dividend from its portfolio. Additionally, 3i could eventually raise debt to support further cash investment, taking advantage of its very low gearing ratio of just 4%. As discussed earlier, we assume that 3i's is buying stakes to other shareholders at a their own valuation. In 2023, 3i reinvested £455mn out of the £762mn from Action's share redemption to increase their stake from 52.9% to 54.8%. We modelled a gradually diminishing increase in Action stake throughout the next 5 years to reach a stake of c.63% in 2030, in line with their forecasted available cash (from realisations but mostly income), and taking into account Borrow's strategy of careful investment in companies as well as the currently conservative private equity landscape.

3i's Valuation

As discussed earlier, 3i's NAV is mostly driven by their profit in the year and dividend payments. For a matter of clarity, here is how 3i’s reported its change in Equity for the FY 2024 :

We have detailed Action’s profit contribution for the year. For the remainder of the portfolio, our forecasts are based on 3i’s guidance where available, supplemented by assumptions for other key components of the income statement, including operating expenses, interest income and expense, fees receivable, and carried interest. It is noteworthy that 3i reported a net profit margin on GRI of 98% in 2023 and 99% in 2024, making the impact of these elements virtually negligible.

Regarding the dividend payments, 3i's follows a strict dividend policy of dividend growth (or at least equal) every year as well as the final dividend payment of the year being at least 50% of previous year total dividend payment (interim + final). Historically, 3i's has been growing its dividend at an average of low double digit, hence we follow this historical average, validated by the proposed dividend communicated in their 2024 annual report. This is consistent with a dividend yield of 1.5%, lower from its historical average as we consider that cash would rather be used in buying more of Action stake. Finally, a negative foreign exchange translation impact is to be expecting in 2025 annual results for the GRI, as communicated by 3i.

Adding all of this to 3i's NAV, we obtain a NAV per share of 26.16 in 2025 and 30.86 in 2026 One multiple that remains to be discussed is the Price/NAV the market applies to 3i. At the current price of £39.04, 3i would be priced at a 1.5x P/NAV for the year ending March 2025, which is higher than 1.35x observed in 2024 and 1.0x in 2023. Hence, based on a forecasted NAV/share in 2026, it is wise to do a sensitivity table based on different P/NAV multiple as below :

(Note of this table : the price used to assess the upside is based on April 14th close of £39.04)

While this P/NAV is significantly higher than that of competitors, who trade on average between 0.9x and 1.0x in the UK and US, it reflects several distinctive aspects of 3i and its portfolio that peers do not necessarily share:

• The relatively strong performance forecasted for Action, as demonstrated throughout this note, along with the expected increase in 3i’s ownership stake, continues to support the premium valuation.

• 3i has delivered strong and consistent NAV growth over the past decade, driven by successful investments and realisations, reinforcing investor confidence

• The group’s low leverage provides financial flexibility and is viewed as a sign of prudent management, particularly under CEO Simon Borrows who has consistently prioritised quality over deal volume.

• 3i’s long-term holding strategy (e.g. Action or Royal Sanders), focused on companies with at least 15% annual growth and EBITDA exceeding €100 million, enables it to retain winners and benefit from compounding returns over time.

• Having spent several dozen hours reviewing its financials, we would also emphasise that 3i demonstrates strong transparency, with detailed reporting and a yearly Capital Markets Day (CMD) that reinforces trust and communication with the market.

For those reasons, we consider a 1.45x P/NAV to be a fair multiple to value 3i, resulting in an upside of 14.6% (+1.5% dividend yield) on the basis of increase in NAV for a stable P/NAV multiple.

Risks

Some of the risks have already been discussed throughout this note but are also highlighted in a short-seller report published at the end of September 2024. Shadowfall Capital & Research, a short-selling investment fund known for its involvement in the Wirecard case, disclosed a multi-million-pound short position against 3i. Shadowfall raised several concerns:

• Action’s margin expansion has been driven more by inflation than by underlying growth;

• The EV/EBITDA multiple of 18.5x used to value Action is significantly above the peer average of 14.4x;

• 3i is trading at a 50% premium to its NAV;

• The potential for store expansion in France may be overestimated.

While I believe most of these concerns have been addressed in this note through relevant data and analysis, it is important to acknowledge that growth expectations, and particularly valuation multiples are somewhat stretched. As such, 3i’s share price could be vulnerable in the event of an underperforming year for Action. Although we do not expect such a scenario to happen, it remains a risk worth keeping in mind. 3i is also vulnerable to many of the typical risks that the Private Equity industry faces, but it is safe to assume that Borrow's strategy helps reassure investors about potential investment risks.

On a side note, the Trump Administration's tariffs policy should not affect 3i's share price drastically as the vast majority of 3i's portfolio is not exposed to those tariffs.

ESG

3i has been rated as a low-risk company in terms of ESG by Morningstar. The company reports on its ESG progress in its annual report, aligning its disclosures with its strategic objectives. A key pillar of 3i’s approach is its commitment to responsible investing. The ESG committee oversees investments and ensures that 3i adheres to a policy of investing in businesses that are committed to environmental responsibility, business integrity, fair and safe working conditions, and strong governance practices. This policy is implemented through a thorough assessment of these criteria during the due diligence process for any prospective investment.

The Board of Directors is only 11% ethnically diverse, with 44% female representation and 66% considered independent, though I would argue that those levels could be slightly higher. The remuneration report underpins that bonuses are mostly based on portfolio performance, with a cap. After reviewing their annual reports, we did not identify any specific ESG-related risks for 3i.

As a side note : A French documentary called Cash Investigation was broadcast on French TV, highlighting the pressure Action's management may place on store employees such as time pressure and harsh comments from store managers. However, this should not be significantly different from what is seen in other retail stores or fast-food chains… Hence, it would be considered an industry-wide issue.

Disclaimers

I, the author, do not hold shares in 3i Group plc as of the publishing of this article on April 17th, 2025. This research note is for informational purposes only and does not constitute investment advice. The information contained in this note is based on publicly available data and sources deemed reliable at the time of writing. However, the accuracy, completeness, and reliability of this information are not guaranteed, and it may be subject to change without notice. The contents of this research note, including any opinions, analyses, and projections, are the intellectual property of the writer. Reproduction, distribution, or use of any part of this note without permission is prohibited.