3i Group (III.L) shares dropped over 14% in London on Thursday midday after the company's fiscal 2026 results showed weaker-than-expected sales at discount retailer Action, its largest investment, amid increased geopolitical uncertainty in the Middle East.
The British investment company reported 5.30 billion pounds sterling in profit for the 12 months ended March 31, up from 5.05 billion pounds a year before. Gross investment return rose to 5.46 billion pounds from 5.21 billion pounds, with its private equity portfolio, including Action, generating 5.30 billion pounds in gross investment return.
Like-for-like sales at Action, however, only grew 2.4% in the 19 weeks ended May 10, compared with 6.8% over the same period a year earlier. "Continued consumer caution in France and lower traffic in Germany since the deterioration of the situation in the Middle East at the end of March, resulted in flat year to date LFL performance in those countries," 3i noted in its earnings release.
As of March 31, 2025, 3i's investment in Action formed 76% of its private equity portfolio value, according to the group's website.
"I said last year that the market environment would remain complex with heightened geopolitical uncertainty. This turned out to be a good general description of the complex backdrop we operated in for FY2026 and continues to set the tone for the year to come, as the duration and indirect impacts from the Middle East situation remain uncertain," Chief Executive Simon Borrows said in an earnings release.
"The market environment remains complex with heightened geopolitical risk from the unresolved Middle East situation in particular. As a result, we expect to see an increase in inflation over the coming months."
In terms of shareholder returns, the board proposed a second dividend of 0.480 pound per share for fiscal 2026, higher than the year-ago 0.425 pound. This brings the full fiscal year dividend to 0.845 pound per share, up from 0.730 pound per share a year earlier.
The group also announced a share repurchase program of up to 750 million pounds to reduce its share capital, which it aims to complete by 2026-end.
"3i reported FY25 results and gave a trading update on Action which will likely disappoint with deteriorating LFLs, weak France and Germany and margin compression. The only sweetener was the announcement of a GBP750m buyback (c. 3% market cap.; higher than the GBP500m expected). Action's YTD LFL came in very weak at 2.4% (we had expected c. 3.5%; consensus at c. 3.6% due to the tougher comp)," analysts at Bernstein said in a quick take note.
"The company flags strength in FMCG but weakness in seasonal categories affected by cooler weather and tough comps. Both France and Germany were flat due to the caution induced by the war in the Middle East. The negative commentary on Germany will be received badly as investors will fear it is the next France."
