3i Group: Inside Britain’s biggest retailer you’ve probably never heard of

£32.5bn investment trust, 3i Group, owns Britain’s biggest retailer: Action.

You’ve likely never heard of Action, and that’s because it doesn’t actually operate in the UK, instead having close to 3,000 stores across 12 European countries like Germany, the Netherlands and France.

The group is kind of like B&M: Selling items at a low cost, with a mix of homeware, seasonal items, and not much food.

Since 3i bought into Action in 2012, it has become the largest investment trust on the UK market, far eclipsing the next biggest competitor, £10.6bn Scottish Mortgage.

Action is massive. In 3i’s full-year results from May, the trust valued its 54.8 per cent private equity stake in Action at £14.2bn, creating an implied price tag for the supermarket at around £26bn, above Tesco’s current market cap of £25bn.

However, 3i Group might be undervaluing its prize holding, as the trust is currently trading more than 53 per cent above the valuation of its total assets.

“Action continues to grow at breakneck speed and as long as its trading momentum stays as strong as it does at the moment, the large premium to net asset value of the company is justified, in our view,” said Liberum analyst Joachim Klement.

Today, 3i Group issued a semi-annual portfolio company review, reporting “good overall performance” in both the private equity (where Action sits) and infrastructure sides of its portfolio.

Focusing on Action (of course), the group said its “impressive performance” had continued, with “very strong sales” and operating profit growth.

Year-to-date sales at the retailer are 21 per cent ahead of the same time last year, with like-for-like sales growth at 9.6 per cent.

“The like-for-like sales growth was driven by customer transactions and strong sales of everyday necessities,” 3i Group said.

The group is now expecting operating profit for the year to come in at 1.9bn (£1.6bn) euros, compared to 1.3bn (£1.1bn) euros the year before, after the group has added 179 net new stores so far in 2024, leaving it on track for its target of 330 stores in the entire year.

“We expect favourable trends for the discount sector, combined with its strong price positioning to drive continued LFL growth for the business,” added RBC analysts Manjari Dhar and Richard Chamberlain.

“Additionally, we note a strong space expansion opportunity, with a proven business model, relatively low capital intensity and fast store paybacks. As such, we expect that Action can continue to drive multi-year double-digit return on investment.”

Looking beyond Action, and 3i Group also noted that private equity holding Royal Sanders and European Bakery Group continued to perform well, along with tour operator Audley and pet food manufacturer MPM.

However, it warned that recruiter WilsonHCG, another significant portfolio holding, had “yet to see any material upturn in the recruitment process outsourcing market”.

“We think that 3i offers a relatively unique strategy relative to peers, predicated on investing longer-term into businesses offering multi-year compounding growth (similar to what Action has delivered),” added Dhar and Chamberlain.

“We also view its approach to capital management as prudent, and we think that its strategy to cover cash costs with cash income serves to de-risk the business.”