Expansion In Private Equity And Resilient Sectors Will Boost Future Performance

Key Takeaways

• Focusing on expanding Private Equity and strategic disposals positions 3i Group for sustainable growth, enhancing future revenue and return on investments.
  
• Increasing Action stake and disciplined purchasing will enhance EBITDA margins, reduce leverage, and improve financial position amid market uncertainties.
  
• Currency fluctuations, political uncertainties, sector difficulties, and increased leverage pose significant challenges to 3i Group's financial performance and asset valuation.

Catalysts

A private equity firm specializing in mature companies, growth capital, middle markets, infrastructure, and management leveraged buyouts and buy-ins.

• The company is focusing on expanding its Private Equity portfolio's investment and realization activity, indicating a disciplined pricing environment and exclusivity on new assets, which is expected to drive future revenue growth.
  
• Action is showing substantial growth, with net sales up 21% and plans to open approximately 350 new stores by the end of the year, likely contributing to revenue growth and improved net margins through operational efficiencies.
  
• Strong performance in resilient sectors like private label and healthcare, along with strategic disposals in Infrastructure at healthy premiums, highlight a potential for increased future earnings and return on investments.
  
• Action’s refinancing activities and 3i’s increased stake in Action are expected to benefit earnings growth by reducing leverage and potential dividend distributions, improving the overall financial position.
  
• Disciplined approach and favorable purchasing conditions are likely to enhance EBITDA margins and revenue, despite external market uncertainties, positioning 3i Group for sustainable growth and improved stock valuation moving forward.

3i Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming 3i Group's revenue will grow by 22.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 98.3% today to 93.7% in 3 years time.
• Analysts expect earnings to reach £7.3 billion (and earnings per share of £7.25) by about February 2028, up from £4.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £6.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, down from 9.4x today. This future PE is lower than the current PE for the GB Capital Markets industry at 12.0x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

3i Group Future Earnings Per Share Growth

Risks

• The foreign exchange translation loss of 48p per share and potential currency fluctuations can negatively impact net asset value and ultimately affect earnings.
  
• Weak growth and political uncertainties in key markets, especially Europe, could hinder revenue growth and affect net margins due to potential operational challenges.
  
• Specific sector difficulties in the automotive sector and the North American white-collar recruitment market could lead to reduced earnings in those areas, impacting overall financial performance.
  
• Action’s refinancing has led to an increase in leverage, which, if not managed carefully, can pose risks to net margins and the company's ability to service debt, especially in volatile financial markets.
  
• The valuation of 3i infrastructure and other portfolio assets might not be fully recognized in the current share price, which could imply market concern over earnings or return on those assets.

Valuation

• The analysts have a consensus price target of £42.527 for 3i Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £46.9, and the most bearish reporting a price target of just £36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £7.8 billion, earnings will come to £7.3 billion, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of £41.03, the analyst price target of £42.53 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.