3i Group PLC (LSE:III) shares fell further on Tuesday, extended losses after hedge fund Shadowfall revealed a short position over the weekend.
Analysts at Citi said they believe that "the concerns are overdone" and retained a 'high-conviction buy' rating and 4,140p target price versus the last close at 3,305p.
"Any weakness of the shares on Monday morning may provide investors with a significant buying opportunity, in our view," said Citi.
Analysts at UBS also provided clients with their thoughts on the matter, though they remain with their 'neutral' rating and 3,389p price target, seeing the share price as "relatively full".
One of Shadowfall's three main arguments for its short position was to question 3i's practice of valuing its investment in Dutch discount retailer Action at 18.5x earnings (EBITDA).
"This does depend, in our view, on what growth rate investors think Action will have in the future," the UBS analysts said, noting that 3i's valuation is on a trailing run rate basis, adjusted for new store growth.
On UBS's forecasts, the current 3i valuation of Action is equivalent to 14.8 times forward EV/EBITDA, "not unreasonable in our view" given forecast 16% earnings growth out to 2027.
"If ShadowFall believes the EBITDA growth rate will be lower, we can understand how they would come to their valuation conclusion."
According to the article in the Sunday Times, which revealed the short position, ShadowFall believes Action's profit margins have also been boosted by inflation, buying goods months in advance and being able to "pocket the benefit of rising prices".
UBS noted that since August 2023, 3i has said Action has been cutting prices, but that strong like-for-like sales growth has been achieved despite this, with 9.6% LFL growth in the first nine months of this year despite an estimated 1% impact from price reductions.
3i has indicated LFL growth from volume is a lower EBITDA margin than from price inflation.
UBS forecasts that LFL will slow to 8.5% in 2025 and 7.0% in 2026, supporting 13-18% annual EBITDA growth, which compares to 3i guidance of mid- to high-single-digit LFL growth and stable EBITDA margin.
Shadowfall also said that 3i is overstating Action's growth potential in France, where it plans to open more than 300 stores.
France is Action's largest country, the UBS analysts noted, with 799 stores at the end of 2023 out of a total of 2,566, with the discount saying only last week that it is on track to achieving its target of 330 net new stores in 2024, with 179 opened in the first nine months of the year.
"Store growth is usually stronger in Q4," the analysts said, adding that "we think the focus on France is interesting given we expect new store growth to come from a range of countries - France, Germany, Poland, Italy and Iberia".