News that 3i Infrastructure (3IN) is selling its 25% stake in Attero at a significant premium to its valuation just four months ago confirms for us the market is undervaluing the shares.

The investment trust, which comes from the same stable as 3i Group (III), a core shareholder and one of the best performers on the FTSE 100 over the past decade, has found life harder on the stock market since interest rates started going up last year.

The sale of Attero, one of the largest waste treatment and recycling firms in the Netherlands, representing 4% of the portfolio at the end of March, is expected to net €215 million or 31% more than the most recent valuation of €164 million.

Richard Laing, chair of 3i Infrastructure, described Attero as ‘a most successful investment, experiencing substantial growth’ since 2018, but said while the trust aims to hold stakes for the long term it would sell where this generates significant additional value for shareholders.

While it would be a stretch to say the entire £3.6 billion portfolio is worth 30% more than its March valuation, the deal suggests the trust is fairly prudent in the way it values its assets.

‘Not only does (the sale) continue management’s strong track record of being able to deliver attractive exits to crystalise value from its portfolio through the cycle, but in our view, it is also suggestive of conservative valuations for wider portfolio companies, which continue to exhibit strong operational performance and growth in line with expectations,’ comment analysts at Numis.

Prior to the sale of Attero, the portfolio consisted of 13 assets across five ‘megatrends’ which the managers believe are shaping the world around us: energy transition (42% of the portfolio), digitalisation (22%), globalisation (22%), demographic change (8%) and renewing social infrastructure (6%).

In the year to March 2023, the fund generated an NAV (net asset value) total return of 14.7%, comfortably above management’s target annual return of 8% to 10%. 3i Infrastructure also raised its 2023 and 2024 dividend target by 6.7%.

Liberum analyst Joseph Pepper views 3i Infrastructure as ‘one of the best-placed funds to deliver attractive NAV return in a capital-constrained environment due to its active management of core-plus companies which provides a plethora of internal levers for growth, including via disposals’.

While the fund trades on a relatively narrow 5% discount to NAV, ‘we do not view this as demanding given management’s strong track record of delivering returns ahead of its 8% to 10% target (14% annualised NAV total return since IPO) and the attractive return potential of portfolio companies going forward,’ adds Numis.

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