3i Gained More Than 50% During First Half of 2023

Ahead of its AGM yesterday, 3i Group provided a positive trading outlook for the rest of the year, expecting the buoyant trading environment to continue. But after it rose more than 50% in the year's first half before subsiding some. Where to next?

The Latest Good News

3i reported sales growing 22% this year, a good showing in the current environment. The focus on retail appears to be paying off, as CE Simon Borrows touted the performance in the Dutch-based Action holding. Despite the European Union slipping into a technical recession this year, Action managed to open more stores than last year in the same period, adding 84 locales over 75. The unit also has €660M in cash, which could keep investors happy that there is room for a  healthy dividend going forward.

But, the rest of the portfolio isn't as outstanding, described as "resilient". 3i can't entirely escape the cost-of-living crisis seen as lowering demand. Still, the company remains optimistic about its prospects for the rest of the year. This came after last month it reported Net Asset Value (NAV) growing at 31% compared to the prior year.

Keeping the Cash Flowing

Following strong trading last year, the company hiked its final dividend by 14% after it saw its valuation improve by 19% in FY23. About 83% of the company's portfolio is exposed to value-for-money and private label. The relative growth of Action has been a boon for the company, and it makes 3i increasingly reliant on one source of income. Last year, cash flow from Action was about a quarter of the company's income and had presumably only increased as a proportion since then, as it grows faster than other elements in the portfolio.

Other portions of the portfolio have also shown some bright spots, such as Belfast City Airport, which has seen income grow since the pandemic's end. The upcoming travel season could be crucial to see how much inflation keeps Northern Ireland travellers from vacationing. The CEO does seem to be aware of the issue of concentrating growth on a smaller number of companies, and last month said that the focus is now on developing additional companies to expand 3i's reach. With £1.3B in liquidity, the company has plenty of room to invest and at least maintain its dividend in the meantime. But whether those new investments will pay off in the current economic environment is an open question.

3i in Accelerated Trend

3i has traded upward since the covid crash in 2020, where it put a low at 530p. Since, it has grown exponentially, ending up whipping into an accelerated trend back in May. With a correction off the record highs of 2035p at play, the upper channel trendline returns in focus. If 1840p fails, the risk of sliding towards the 1685p swing will increase once the stock re-enters the primary trend. Conversely, breaking past the top might see an extension towards the 161.8% Reverse Fibonacci of the long-term 530p - 1500p leg, settled near 2100p.

Source: SpreadX / 3i GROUP

Key Takeaways

3i Group has had a successful first half of 2023, with shares rising more than 50% at some point. Despite the EU facing a recession, the company's retail focus resulted in a 22% increase in sales and the opening of more stores. However, the rest of the portfolio is described as "resilient" partly due to the cost-of-living crisis, with Cash flow from Action making up a significant portion of the company's income. With ample liquidity, 3i has room for investments and to maintain its dividend, but the success of these investments in the current economic environment remains uncertain.