Morgan Stanley hikes target for 3i, says portfolio undervalued
By Alexander Bueso
Date: Wednesday 29 Jan 2020
(Sharecast News) - Analysts at Morgan Stanley hiked their target price for shares of private equity and infrastructure investor 3i from 950.0p to 1,300.0p after taking a fresh look at its major assets, especially in retail.
They also upgraded their recommendation for the stock from 'equalweight' to 'overweight'.
Having conducted a discounted cash-flow analysis of Action, Europe's largest non-food discount retailer, they estimated that 3i's stake was worth 469.0p, or 82.0p more than the net asset value estimated by 3i itself using a multiple-based approach.
High-teens growth in Action's earnings before interest, taxes, depreciation and amortisation would also support double-digit earnings growth at the group level for 3i, they said.
And excluding Action, a sector valuation suggested that the 11.0 times EBITDA multiple used by 3i was "conservative", with valuation supported by 3i's healthcare assets, not least given the 25.0-50.0% premiums that strategic buyers typically pay.
As well, the investor's 13.0% implied cost of equity, versus 9.0% for peers, more than covered the extra risk from its balance-sheet driven business models, versus peers who used third party funds resulting from the "potential for greater volatility in a downturn", Morgan Stanley explained.
Furthermore, added the analysts: "Non-cyclical exposures, unlevered group balance sheet and healthy distribution provide downside protection."
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