Instead of the derailleur, to go from a 7-speed to a 3-speed? Yes, it can be done. Are you building the wheel yourself? Using a vintage hub, or modern hub? If so, be aware that older SA rear hubs may use 40 spokes, and 40 hole rims are now a specialty item. The rear frame spacing can also be an issue. Many older hubs are spaced at 114mm, considerably narrower than most frames designed for derailleur drivetrains. Modern Sturmey-Archer production uses longer axles, and shouldn't be a problem. The vertical dropouts on the frame in your picture may require use of a chain tensioner.