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Action is a Dutch discount store chain majority owned by 3i, the UK-listed private equity fund. Action is bigger by implied market cap than Tesco. It’s bigger than Next, M&S and JD Sports put together, and bigger than the whole of the FTSE 250 retail sector. It’s more than five times bigger than B&M, the FTSE 100 retailer it most closely resembles.
Size aside, however, there’s not much about Action that’s exceptional. For example, its website sells stuff like a no-brand floating lounger that’s strikingly similar to ones listed on Alibaba, Walmart, B&Q, AliExpress, Best Buy, The Range, Wayfair, Groupon and Amazon.
No more distinctive, though much more important to the investment case, are the shops. Action uses the usual discounter strategy of stocking a tightly-managed mix of small homewares, long-shelf-life groceries and seasonal lines on rotation. It rolls out a nearly identical store format in all countries then uses cross-border scale to bulk buy, often locally, which is also how Lidl and Aldi operate. Two-thirds of its shelf prices are €2 or below. For the uninitiated there’s a hypnotically boring selection of Action store tours on YouTube that will probably look familiar to anyone who’s been to a Dollar General, a Home Bargains or a Pepco over the past decade.
What Action is is very big, which is what makes it cheap. The store count at the end of March was 2,608 across 12 Eurozone countries (all leasehold, mostly out-of-town) with 42 net new openings in the previous three months. At an investor day in March, the company said its ability to buy local and sell global meant it was on average 40 per cent cheaper than the domestic competition.
How much is scale worth to investors? That’s where things get tricky.
Full-year results from 3i yesterday put a £14.2bn value on its 54.8 per cent stake in Action. The publicly-listed private equity group uses an 18.5x multiple on its run-rate ebitda, adjusted for recent store openings. This is pretty punchy — peers trade at about 14 times trailing ebitda, on average — but not unreasonable given superior growth.
For the past five years, Action has maintained a record of growing earnings approximately three times as fast as the peer group. For the quarter ending March its year-on-year run-rate ebitda growth was 28 per cent. And while like-for-like sales growth has slowed a bit, expansion plans matter more. Portugal, Switzerland and Romania are this year’s new markets, with management seeing space to approximately triple the European store count at a pace of 300 to 400 openings a year. Then comes expansion into the US, Asia and perhaps even the UK by the end of the decade.
Most listed retail stocks are to some degree barometers of consumer confidence. Action has maintained its reputation as a growth compounder:
But of course, there’s no live market for Action shares. The only way in is to buy 3i, which at pixel time is trading at a 36 per cent premium to net asset value.
Mark the remaining 3i portfolio to book and its Action shareholding has a market value of about 27x run-rate ebitda, falling to 23x this year.
Assuming a 20 per cent portfolio discount (which for the sector isn’t unreasonable right now) Action’s implied forward ebitda multiple moves towards 25x.
Among the global discounters only CostCo is awarded a similar multiple. The chart below, from Barclays, is a few days out of date but gives the gist:
CostCo benefits by being normal. It offers similar growth rates in a clean investment proposition. 3i, meanwhile, can give no indication of when or even how it intends to realise capital gains on an investment that now makes up 72 per cent of its portfolio. Refinancing an Action debt line in November successfully extracted €353mn from the business, net, but it’s probably not a repeatable trick.
Fortunes have been missed by arguing that fast-growing retailers are too expensive based on high multiples alone. Walmart, famously, was too cheap in the early days at any price. Action’s growth is on a similar trajectory. The concentration risk makes 3i something other than a normal PE investment, but it’s not necessarily an irrational one.
The one conclusion we can draw is that Action disproves the argument that for London-listed companies, New York valuations are out of reach. So long as the business isn’t managed from the UK, has no operations in the UK, and is marked once a quarter inside a complicated wrapper that just happens to be listed in the UK, anything’s possible.
