UBS has reaffirmed its buy rating on 3i Group, the FTSE 100 investment company, pointing to fresh evidence that its most important holding is on the mend.
The bank kept its price target at 3,200p, implying roughly 20% upside from the recent 2,675p.
At the heart of the case is Action, the European discount retailer that accounts for more than 70% of 3i's portfolio and investment returns.
Reading the card data
To track Action between company updates, UBS leans on its Evidence Lab, which analyses anonymised credit and debit card spending across Europe.
The latest data, for August, showed sales growth at Action in France and Germany continuing to improve, extending a recovery that began late last year.
That matters because Action's French business stumbled badly last autumn, prompting a surprise warning from 3i in November.
UBS cautioned that the card data is only a rough proxy for actual sales, and covers just the two countries that make up about half of Action's revenue.
The valuation gap
Analyst Haley Tam argued that 3i still looks cheap, trading at 0.8 times forecast book value.
That is up from lows of 0.6 times earlier this year, but the discount suggests the market remains unconvinced by the value 3i places on Action.
The company carries the retailer at 18.5 times run-rate earnings, a punchy multiple that could look exposed if growth stalls.
Waiting for proof
UBS expects the recovery to feed through, forecasting 4.2% like-for-like growth at Action this calendar year and 11% growth in underlying earnings.
The next test comes with 3i's half-year results in November, when investors will look for hard evidence that price cuts in France are working.
Should confidence return, UBS believes the shares can re-rate back towards, or beyond, book value.
