Morgan Stanley hikes target for 3i, says portfolio undervalued
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."