Why this investment bank thinks 3i Group is worth a look: It's all about Action

Citi reiterated its 'buy' rating on 3i Group PLC due to strong growth prospects at Action, its major portfolio holding, driven by aggressive store expansion in Europe. While this strategy cannibalizes existing store sales, reducing Citi's 2025 like-for-like (LFL) growth forecast from 8.6% to 7.7%, the bank anticipates long-term benefits from a denser store network and untapped market potential. Citi also increased its target price for 3i from £48.50 to £50.00, citing a recent dip in risk-free rates; 3i shares were trading 1.6% higher following the report.

Analysis

Citigroup has reiterated its 'buy' rating on 3i Group PLC, primarily driven by the strong performance and strategic expansion of its key portfolio holding, discount retailer Action. Citi's optimism is rooted in Action's aggressive store rollout program across key European markets, including Switzerland and Germany. While this expansion leads to some cannibalization of sales from existing stores, quantified as reducing like-for-like (LFL) growth by approximately 60 basis points and leading Citi to adjust its 2025 LFL forecast for Action from 8.6% down to 7.7%, the investment bank views this as a positive trade-off. The rationale is that new store growth signifies robust underlying demand and supports a denser store network, with Citi believing Action's own projections for store potential are conservative, indicating substantial untapped "white space." Recent trading updates from Action showed an 8.1% LFL growth for weeks 13–19, and Citi anticipates potential acceleration in the near term, partly due to supportive weather patterns. Although Citi has not made significant changes to its core earnings forecasts for 3i, a recent decline in risk-free rates prompted an increase in its price target for 3i from £48.50 to £50.00. In response to this analysis, 3i Group's shares were trading 1.6% higher at 4,334p. Investors will be looking towards June 26 for the next set of key performance indicators from Action to further assess its momentum.

Key Decisions for Investors

• Investors may consider 3i Group's prospects favorably, aligning with Citi's 'buy' recommendation, given the strong growth trajectory and expansion strategy of its principal asset, Action.
• It is advisable to closely monitor Action's upcoming key performance indicators, due on June 26, for further validation of its growth momentum and the effectiveness of its store expansion strategy.
• Investors should weigh the short-term moderation in Action's like-for-like sales growth, a consequence of new store cannibalization, against the potential for long-term value creation through increased market penetration and overall revenue expansion.
• Acknowledge the sensitivity of 3i's valuation to macroeconomic factors, such as changes in risk-free rates, which directly influenced Citi's recent target price revision and can impact future valuations.