3i Group (LSE: III) shares climbed another 6% on Wednesday as the FTSE 100 private equity investment trust continued its recent recovery.
The jump followed a strong first-quarter update from Action, the European non-food discount retail chain that now dominates 3i’s £32bn investment portfolio.
Action reported a total first-quarter return of 3% despite negative currency movements, with operating EBITDA earnings rising 13% to €1.1bn in the six months to 28 June.
The retailer now operates 3,423 stores after adding 121 outlets in just six months, and remains on track to open at least 400 new stores across the full year.
Despite the recent bounce, 3i shares are still down approximately 40% over the past 12 months, and currently trade at a 16.8% discount to underlying net asset value.
That compares unfavourably with the stock’s 12-month average discount of 12.9%, suggesting there may still be room for recovery as investor sentiment gradually improves.
3i was originally founded in 1946 to provide long-term capital and equity to smaller and medium-sized businesses, but Action now accounts for roughly three-quarters of its entire portfolio.
The company maintains a strong balance sheet, with gross cash of £724m, minimal gearing of just 2%, and an active £750m share buyback programme currently under way.
Income investors are also catered for, with the stock carrying a trailing dividend yield of 3.1%, and a final dividend of 48p per share recently confirmed by the board.
The company’s ambitions to expand Action into the United States represent both the biggest opportunity and the most significant risk facing 3i shareholders over the coming years.
America is a notoriously difficult retail market for foreign entrants, and any stumble there could weigh heavily on 3i’s share price performance for an extended period.
On the other hand, a successful US expansion could deliver exponential returns for long-term investors willing to accept the volatility that has come to define this stock in recent times.
The shares had already jumped 10% on 25 June after the board revealed Action’s sales had risen 3.3% so far this year, signalling a potential turning point following months of disappointing performance.
Investor expectations remain high, meaning any future slowdown in sales or earnings growth is likely to be swiftly and severely punished by the market.
For growth-focused investors comfortable with above-average risk, 3i Group continues to present a compelling but genuinely high-stakes proposition at current valuations.