3i Group
As a private equity investor with plenty of exposure to the travel and automotive sectors, retailers and gyms, 3i really should have been brought lower by the coronavirus pandemic (Miles Costello writes).
Yet the blue-chip investment group’s results for the first half, published yesterday, defied even its own performance expectations, which it had marked lower in May when it published its annual results.
It is not immune to Covid-19, of course, and parts of the portfolio are suffering, but so far this has been more than balanced by strength elsewhere.
3i traces its history back to 1945 and a £15 million fund called the Industrial and Commercial Finance Corporation, set up by the government to help companies rebuild after the end of the Second World War. It changed its name to 3i during the late 1980s, listed on the stock market in 1994 and is now a member of the FTSE 100 valued at more than £10.5 billion.
The group is unlike most private equity investors, and not just because it is listed. For starters, it does not raise money from outside parties, using its own capital to invest in small and midsized businesses, mainly in Europe and the United States. It invests in both privately owned and quoted companies and owns a 30.2 per cent stake in 3i Infrastructure, a listed backer of assets including wind farms, fibre-optic networks and aviation.
Over the six months to the end of September, 3i’s returns from the private equity portfolio really motored, delivering a gross investment return of just under £1.25 billion, almost double the comparable £666 million for the same period last year.
That was in no small part due to a £644 million mark-up in the valuation of its 52.6 per cent stake in Action, a fast-growing Dutch non-food discount retailer.
Action was hit hard during the first two months of the pandemic, having to close outlets in countries including France, Belgium and Germany. However, all of its shops reopened in May and have continued to trade since, albeit selling a reduced range. It has also opened 115 new stores.
3i’s stake in the retailer is valued at £4.27 billion, equivalent to a reassuringly modest multiple of its run-rate earnings this year of 18 times.
It would be a mistake to think that life is all plain sailing for 3i, however, and some of the companies it invests in are feeling the pressure.
The group has a holding in Audrey Travel, a luxury tour operator that has been hit by restrictions and cancellations, for example. Although 3i injected about £50 million into the company during the period, its investment still accounts for less than 1 per cent of the portfolio.
There is also 3i Infrastructure’s substantial stake in TCR, which provides ground support equipment at about 100 airports and is likely to be hit by the aviation downturn.
The group’s portfolio is relatively shielded from the downturn in stock markets — and the holding in 3i Infrastructure has performed well this year. However, prospective investors need to bear in mind that valuations for private companies are benchmarked against those of their quoted peers and so can be volatile.
Standing back, there is much to commend 3i, a consistently strong performer in recent years.
The shares, up 27p, or 2.5 per cent to £11.11 yesterday, have risen by more than 135 per cent in the past five years and trade at a premium of more than 24 per cent to the net value of its assets.
Yet at a multiple of only 6.3 times Barclays’ forecast earnings, and with a prospective dividend yield of 3.27 per cent, they look attractive.
ADVICE Buy
WHY Portfolio is diverse and high quality and the shares remain modestly priced with a respectable yield
Grafton
A rise in consumer spending on home improvement during the pandemic has resulted in buoyant trading at one of Britain’s biggest suppliers of building materials (Louisa Clarence-Smith writes).
Grafton owns Woodie’s, the DIY retailer, and Selco, the building merchant. It also supplies cement and dry mortar to housebuilders. It trades from about 500 branches and employs 1,200 people.
The company posted better than expected revenues of £1 billion for the four months to October, up 5.1 per cent year on year.
Its management believes it has benefited from pent-up demand that developed during the first lockdown and from households investing savings from reduced spending on travel, leisure and hospitality in their homes. The increase in the number of people working from home is also thought to have contributed to higher demand in its stores and branches.
Revenue from its retailing division rose 41.4 per cent in the four months to October. Operating profit is now expected to be between £170 million and £180 million this year, about 20 per cent ahead of analyst estimates.
Goodbody, the broker, said that Grafton would be the only UK company within its coverage to grow margins in the second half of the year. It also has a strong balance sheet, with about £150 million of net cash at the end of October, compared with £59 million in June.
Housebuilders have reported that demand for new homes has shown no signs of slowing since the introduction of a second lockdown.
Companies including Deloitte and Schroders have announced a permanent shift to more home working. With others likely to follow, the trend towards renovating homes to accommodate home working can only continue well into next year.
Shares in Grafton have risen by about 140 per cent since hitting a low of 371p at the onset of the crisis in March. However, they remain down by about 10 per cent from where they were at the start of the year.
It trades on a 2022 price to earnings ratio of about 13 times and a yield of 3 per cent, which is a discount to historic levels. Given the strength of the market in light of lifestyle changes and government incentives for home-moving, that seems unjustified.
ADVICE Buy
WHY The home renovation boom looks set to continue
