REG - 3i Group PLC - 3i Group plc FY2023 Q3 performance update

3iAnnouncement

26/01/2023 07:00

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RNS Number : 8948N  3i Group PLC  26 January 2023

26 January 2023

3i Group plc

FY2023 Q3 performance update

 

 

 

 A positive third quarter. On track to deliver another year of good growth

 ·    Increase in NAV per share to 1,649 pence (30 September 2022:1,477
 pence) and total return of 26.8% for the nine months to 31 December 2022

 ·    Action produced another excellent result with very strong sales,
 EBITDA and cash generation in 2022. In the 12 months to 1 January 2023, net
 sales and EBITDA were 30% and 46% ahead of 2021

 ·    The value for money, private label, healthcare and infrastructure
 investments continue to perform resiliently and represented 83% of our
 investment portfolio at 31 December 2022. We continue to see headwinds across
 our discretionary consumer portfolio companies

 ·    Strong cash generation from the Private Equity portfolio in the
 quarter with £474 million of realised proceeds received from divestments and
 £166 million of cash dividends

 ·    Our buy-and-build momentum continues with four bolt-on acquisitions
 completed or signed, including the acquisitions of two components of Q
 Holding's medical business by SaniSure and Cirtec Medical

 ·    Signed the full disposal of Christ at a c.43% uplift on 31 March 2022
 opening value, with completion expected in Q4 FY2023

 ·    Good contribution from 3i Infrastructure plc ("3iN") and our US
 Infrastructure portfolio. Two bolt-on acquisitions completed for Regional Rail
 and one for EC Waste

 ·    Well-funded balance sheet at 31 December 2022 with gross cash of
 £495 million and gearing of 3%

 

Simon Borrows, Chief Executive, commented:

 

"Action has once again delivered some very impressive results and starts the
New Year with good momentum across all ten of its geographic markets. The
fundamentals of the business and financial model are very strong and its low
prices and flexible category format are generating significant customer
traffic. Action has a considerable white space roll-out opportunity ahead of
it and we anticipate another strong year of performance in 2023.

 

The Private Equity and Infrastructure portfolio continues to demonstrate its
resilience in challenging trading conditions. Our strategy of investing in
assets backed by long-term, through the cycle growth trends means we are well
equipped to mitigate macroeconomic headwinds that are impacting a small pocket
of the portfolio, most notably the discretionary consumer segment. We remain
disciplined and selective in deploying our proprietary capital and we continue
to enhance our portfolio through targeted bolt-on acquisitions".

 

Private Equity

 

Portfolio performance and valuation at 31 December 2022

 

In the 12 months to 1 January 2023, Action generated net sales growth of 30%
and added 280 stores, taking its total to 2,263 stores across ten countries.
Provisional 2022 EBITDA, which is still subject to audit, was €1,205
million, 46% ahead of 2021. Net sales (€8,859 million) and EBITDA (€1,205
million) were 73% and 123% ahead of 2019. Sales leverage and good cost
discipline were the main drivers behind the increased EBITDA margin of 13.6%.
Covid-19 restrictions were limited to the first quarter of 2022 with full
store closures in the Netherlands in the first two weeks of the year.

 

Given the Covid-19 disruption in December 2021, like-for-like ("LFL") sales
growth was particularly strong in Q4 2022, averaging 23% in the quarter.
Action generated LFL sales growth for the year of 18%, with transactions
significantly ahead of last year. Action generated good sales across all its
geographies.

The new country openings in Italy and Spain have started very well and are
trading materially ahead of their investment case. Action's supply chain
performed effectively throughout the year ensuring improved availability
across the store base notwithstanding the global logistical challenges of
2022.

 

Action paid an interim dividend to shareholders in December 2022, resulting in
a distribution of £159 million to 3i, and finished the year with a cash
balance of over €697 million.

 

Action has performed remarkably well since the early days of the Covid-19
pandemic, reaching its 2019 five year plan target of €1 billion of EBITDA a
year and a quarter ahead of schedule, and has more than doubled EBITDA over
the three years since 2019.

 

At 31 December 2022, Action was valued using the LTM run-rate earnings of
€1,312 million to 1 January 2023 and an unchanged multiple of 18.5x net of
the liquidity discount, resulting in a valuation of £10,276 million (30
September 2022: £8,612 million) for 3i's 52.7% equity stake.

 

A good number of our large Private Equity portfolio companies continue to
trade resiliently despite the tough macroeconomic backdrop. In the quarter we
saw strong performance from AES following sustained demand in the global seal
market, from Royal Sanders which continued to generate strong sales from
existing customers, and from WilsonHCG which has continued to grow
year-on-year. Whilst we saw some destocking effects across parts of the
healthcare sector, we made significant strategic progress in consolidating our
segment capabilities in our healthcare assets to ensure we can maximise their
potential in the coming years. Our travel assets continue to recover strongly.

 

Our discretionary consumer portfolio companies continue to experience
challenging consumer headwinds and detract from the overall performance of the
Private Equity portfolio. Whilst this continuing pressure was largely
expected, Luqom saw weak trading in December 2022, with muted consumer demand
and mix effects causing a further reduction in its earnings forecast for the
year which resulted in a value reduction of £72 million in the quarter to 31
December 2022.

 

Peer group multiples across the portfolio generally improved over the quarter,
reflecting a partial recovery in stock market indices. No adjustments were
made to the portfolio companies valuation multiples in the period.

 

Private Equity investments

 

 Private Equity                                                                                                               Investment
 investment        Type               Business description                                         Date                       £m
 ten23 health      Further            Pharmaceutical product CDMO                                  October and December 2022  9
 Formel D          Further            Quality assurance provider for the automotive industry       November 2022              11
 YDEON             Further            Digital platform for home and garden projects across Europe  December 2022              15
 Digital Barriers  Further            Provider of unique video compression technology              December 2022              10
 xSuite            Return of funding  Accounts payable invoice automation software                 December 2022              (7)
 Total Q3 FY2023 investment                                                                                                   38
 H1 FY2023 investment                                                                                                         292
 Total investment as at 31 December 2022                                                                                      330

In the quarter, we completed a £10 million further investment in Digital
Barriers and a £9 million further investment in ten23 health as we continue
to develop their platforms. We also invested £15 million in YDEON and £11
million in Formel D, supporting both businesses through challenging trading
conditions.

 

Our buy-and-build momentum continued in the quarter. AES acquired Vibtech
Analysis, a reliability service provider based in Canada and WilsonHCG agreed
to acquire Personify, a provider of recruitment processing outsourcing
services. This acquisition completed post the quarter end, with a 3i
contribution of $7 million.

 

Following our partial disposal of Q Holding's QSR division earlier in this
financial year, we carved out two components of Q Holding's remaining QMD
business, which are being acquired by our existing portfolio companies
SaniSure and Cirtec Medical. In December 2022, SaniSure completed the
acquisition of Q Holding's Twinsburg site, a leading silicone extrusion
business, and its customers who operate in the single-use technology
bioprocessing industry. Also in December 2022, Cirtec Medical agreed terms for
the acquisition of Q Holding's Precision Components business, an elastomeric
solutions provider in the medical device outsourcing market. Both acquisitions
will be self-funded by the portfolio companies and will provide differentiated
capabilities and enhance their strong growth momentum. As a result of this
transaction, 3i is expected to receive a distribution of c.$172 million from Q
Holding in Q4 FY2023.

 

Private Equity realisations

 

 Private Equity                                  Realisation proceeds
 Realisations                                    £m
 Havea                                           471
 Other                                           3
 Total Q3 FY2023 realised proceeds               474
 H1 FY2023 realised proceeds                     193
 Total realised proceeds as at 31 December 2022  667

In the quarter, we recognised total realised proceeds of £474 million, of
which £471 million was from the full divestment of Havea.

 

In December we agreed the sale of Christ, our last investment in EuroFund V,
for gross proceeds to 3i of up to €53 million, at a c.43% uplift on 31 March
2022 opening value.

 

Infrastructure

 

3iN's underlying portfolio continues to perform very well, showing strong
growth momentum and generating a good level of portfolio income. Its share
price increased by 10% in the quarter to 31 December 2022 to 334 pence (30
September 2022: 304 pence), valuing 3i's 30% stake at £899 million (30
September 2022: £817 million). We also recognised £15 million of dividend
income from 3iN in the quarter.

 

Smarte Carte continues to perform well, driven by strong footfall. Our North
American Infrastructure platform was active in the quarter, with Regional Rail
completing two bolt-on acquisitions, comprising three short-line rail assets
in the mid-west region of the United States and a portfolio of rail assets
located across central Canada. 3i invested a further £7 million to support
these transactions. EC Waste completed the self-funded bolt-on acquisition of
A&A Waste Management, a business that provides non-hazardous solid waste
collections in Puerto Rico.

 

 

Scandlines

 

Scandlines produced another solid result in the quarter following a good peak
summer season. Whilst 2022 was a strong year for freight volumes, there is an
expectation of tougher macroeconomic conditions in 2023. Good operational
performance and liquidity management continues and the business is well
equipped to mitigate potential headwinds. A dividend of £12 million was paid
to 3i in the quarter.

 

Top 10 investments by value(1) at 31 December 2022

 

                                        Valuation  Valuation
                  Valuation  Valuation  Sep-22     Dec-22
                  basis      currency   £m         £m         Activity in the quarter
 Action           Earnings   EUR        8,612      10,276     £159 million dividend received
 3iN              Quoted     GBP        817        899        £15 million dividend recognised
 Cirtec Medical   Earnings   USD        613        569        Agreed terms to acquire the bolt-on acquisition of Q Holding's Precision
                                                              Components business
 Scandlines       DCF        EUR        554        557        £12 million dividend received
 Tato             Earnings   GBP        437        428        £7 million dividend received
 SaniSure         Earnings   USD        422        404        Completed the bolt-on acquisition of Q Holding's Twinsburg site
 nexeye           Earnings   EUR        401        396
 Royal Sanders    Earnings   EUR        322        339
 AES Engineering  Earnings   GBP        298        314
 Evernex          Earnings   EUR        314        303

 

 1.  The valuations are translated at the spot rate of the balance sheet date and
     exclude the impact of the foreign exchange hedging. Sterling weakened by 1%
     against the euro and strengthened by 8% against the US Dollar in the quarter
     to 31 December 2022.

 

 

The 10 investments in the table above comprised 83% (30 September 2022: 78%)
of the total

investment portfolio value of £17,528 million (30 September 2022: £16,417
million).

 

 

Total return and NAV position

 

In the quarter, we implemented a medium-term foreign exchange hedging
programme to partially reduce the sensitivity of the Group's future returns to
euro and US dollar exchange movements. Over that period, sterling weakened by
1% against the euro and strengthened by 8% against the US dollar resulting in
a foreign exchange gain of £102 million and a foreign exchange loss of £171
million respectively, before the impact of hedging. Including the impact of
hedging, we recognised a net £28 million gain in the quarter on foreign
exchange translation, and a net gain of £739 million in the nine months to
the end of December 2022.

 

Based on the net assets at 31 December 2022 and including the impact of
hedging, a 1% movement in the euro and US dollar would result in a net total
return movement of £96 million and £13 million respectively. The diluted NAV
per share increased to 1,649 pence (30 September 2022: 1,477 pence) or
1,625.75 pence after deducting the 23.25 pence per share first FY2023
dividend, which was paid on 11 January 2023.

 

 

Balance sheet

 

At 31 December 2022, cash was £495 million (30 September 2022: £55 million),
and, including our undrawn £900 million revolving credit facility, liquidity
was £1,395 million (30 September 2022: £801 million). Net debt was £480
million and gearing 3% (30 September 2022: £1,074 million and 8%). The first
FY2023 dividend of £223 million (or 23.25 pence per share) was paid on 11
January 2023.

 

The Group will repay its £200 million fixed rate bond when it falls due in
March 2023.

 

 

- ENDS -

 

 

Notes

 

 1.  Balance sheet values are stated net of foreign exchange translation. Where
     applicable, the GBP equivalents

at 31 December 2022 in this update have been calculated at a currency exchange
     rate of €1.1276: £1 and $1.2025: £1 respectively.
 2.  At 31 December 2022 3i had 964 million diluted shares.
 3.  Action was valued using a post-discount run-rate EBITDA multiple of 18.5x
     based on its LTM run-rate earnings to 1 January 2023 of €1,312 million. The
     LTM run-rate earnings used include our normal adjustment to reflect stores
     opened in the year.
 4.  As at 31 December 2022, the notional amount of the forward foreign exchange
     contracts held by the Group was €2.6 billion (including €600 million
     associated with Scandlines) and $1.2 billion.

 

 

For further information, please contact:

Silvia Santoro

Group Investor Relations Director

Tel: 020 7975 3258

 

Kathryn van der Kroft

Communications Director

Tel: 020 7975 3021

 

 

About 3i Group

3i is a leading international investment manager focused on mid-market Private
Equity and Infrastructure. Our core investment markets are northern Europe and
North America. For further information, please visit: www.3i.com
(http://www.3i.com) .

 

All statements in this performance update relate to the three-month period
ended 31 December 2022 unless otherwise stated. The financial information is
unaudited and is presented on 3i's non-GAAP Investment basis in order to
provide users with the most appropriate description of the drivers of 3i's
performance. Net asset value ("NAV") and total return are the same on the
Investment basis and on an IFRS basis. Details of the differences between 3i's
consolidated financial statements prepared on an IFRS basis and under the
Investment basis are provided in the 2022 Annual report and accounts. There
have been no material changes to the financial position of 3i from the end of
this quarter to the date of this announcement.

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