Slump for the owner of discount retailer Action

The holding company's share price fell sharply after the publication of its interim results. However, the figures are relatively good: profits rose, asset value is up and it has increased its dividend. Investors are taking their profits and questioning the group's dependence on its main asset.

On paper, 3i has had an excellent first half. Pre-tax profit rose 60% to £3.3bn. Net asset value rose 12%. Its dividend rose from 30.5 to 36.5 pence per share. Currencies also helped, with the company gaining £673m from the appreciation of the euro.

The entire portfolio remains dynamic, even though the two Dutch holdings, Action and Royal Sanders, account for the majority of the value and explain a large part of the performance.

However, Action remains the jewel in the British company's crown. The hard-discount retailer is continuing its rapid expansion in Europe. Three hundred and seventy store openings are planned this year, with the first in Switzerland and Romania. Geographic expansion is continuing at a rapid pace. Operating profit rose 21% year-on-year.

However, same-store sales declined in September, particularly in France and Germany. For the time being, new store openings are more than offsetting this, although the economic environment remains challenging.

3i now owns 60.1% of Action after buying back 2.2% from GIC in exchange for new shares. According to market estimates, this stake represents around three-quarters of the group's value, which is indeed significant. The strategy has been successful so far. 

Nevertheless, it should be noted that 3i has been able to create value beyond Action. In the consumer sector, the holding company has invested in WaterWipes, following on from the tremendous capital gains realized on MPM. In the tech sector, it favors recurring revenues, as with OMS, a specialist in electrical testing in Germany.

However, a pullback was certainly necessary. 3i was already trading at around 1.5x its asset value, which is high. Furthermore, even though it is slight, Action's slowdown is a cause for concern. Finally, the M&A market remains difficult, which limits movement and therefore cash generation. 

Today's decline therefore looks more like a premium adjustment than a challenge to the model. Fundamentally, 3i remains well managed and particularly profitable. This explains its tremendous performance in recent years.