LONDON (ShareCast) - (ShareCast News) - Analysts at Morgan Stanley upgraded their recommendation on shares of 3i and revised their target price higher, arguing the company's holding in retailer Action was higher than what owner 3i was letting onto.
As of December 2016, the investment group valued Action, the Benelux-focused non-food discount retailer, at €5.5bn or 142.0p per share using an EBITDA-multiple valuation method.

However, such an approach underestimated the company's long-term potential and "unusual" ability to generate cash, the broker's analysts said.

Indeed, using a discounted cash-flow model with "undemanding assumptions" Action might be worth north of €10.0bn, or 250.0p per share to 3i.

That led the broker to up its recommendation on 3i's shares from 'Equalweight' to 'Overweight' and raise its target price from 710.0p to 823.0p.

To further back up its case, Morgan Stanley compared Action to rival B&M.

Both firms enjoy "compelling" economic models, faced a limited threat from online competition and were growing very rapidly.

Yet Action was the more attractive of the two investments from a score of angles, Morgan Stanley added.

Those included a more advanced and proven international expansion strategy, a more favourable working capital cycle, delivery of better sales densities, better returns and cash conversion.

Morgan Stanley kept its recommendation on stock in B&M at 'Overweight' with a 350.0p target price.

"We are still very keen on B&M,even though Action screens better in our side-by-side comparison; it is our assessment of Action that is changing today,not our views on B&M."

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