Ann: FLLYR: CDN: Results for the year ended 31 Ma

• Release Date: 25/05/12 10:30
• Summary: FLLYR: CDN: Results for the year ended 31 March 2012
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CDN
25/05/2012 08:30
FLLYR

REL: 0830 HRS Caledonia Investments Plc

FLLYR: CDN: Results for the year ended 31 March 2012

HIGHLIGHTS

- 7.0% decrease in diluted NAV total return over the year vs 1.4% increase in
the FTSE All-Share Total Return index

- 118.9% total shareholder return over ten years (53.4% outperformance vs
FTSE All-Share Total Return index)

- Substantial increase in the dividend for the year of 15.6% to 42.9p.
Further increases in dividend likely as portfolio income rises

- Significant progress on strategic initiatives to enhance portfolio income,
strengthen management and refine investment processes

- Portfolio transition progressing well,  248m invested and  130m realised

- Income & Growth pool successfully established at  111m with target  200m
over next two years

- Rod Kent to succeed James Loudon as Chairman from July 2012

CHAIRMAN'S STATEMENT

Results

Caledonia's net asset value per share on a total return basis has
underperformed the FTSE All-Share by 8.4% over the past 12 months and by
14.1% over the past five years. With a concentrated and long term portfolio
such as ours, deviation in our performance from the index over any one year
is not surprising. However, the underperformance over five years is
disappointing. Our total shareholder return performance has also been
significantly affected by the widening of our share price discount to net
asset value. We have increasingly bought in our own shares as the discount
has widened, as we believe that this represents good value for our
shareholders, but ultimately we believe it will be investment performance,
rather than share buy-backs, which will cause our discount to narrow. The
extent of our buy-backs is limited by the shareholding of the Cayzer concert
party.

The future outlook is much more positive. One of the cornerstones of the
strategy set out in last year's annual report was to increase, without
undermining our core objective of long term capital growth, the yield flowing
from our portfolio, in order to enable us in turn to enhance the income
element of the total return for our shareholders. The re-shaping of our
portfolio over the past year has laid the foundation to achieve this and the
board's confidence in a steadily rising trend in income over the next few
years has enabled it to make the recommendation for a significant increase in
the final dividend as set out below.

In addition, I am pleased to report that, within Caledonia's established
investment model, the other strategic initiatives highlighted in last year's
annual report are starting to bear fruit, including a refined investment
process, improved deal flow, attractive new investments and the sale of
non-core and subscale investments. These are described in more detail in the
Chief Executive's report.

Dividend

In view of its confidence in the future benefits of the strategic initiatives
being undertaken, and in particular in relation to Caledonia's foreseeable
income prospects, the board has proposed raising the final dividend by 20.0%
from 26.0p to 31.2p per share, payable on 9 August 2012. The total dividend
for the year will therefore amount to 42.9p per share, an increase of 15.6%
over the previous year.

The board's objective is to continue with a higher rate of increase in the
dividend as income from the portfolio grows. Once we have reached a new base
level, we intend to pursue a progressive dividend policy bearing in mind our
record of increasing dividends every year for the last 45 years but without
detracting from our fundamental aim of providing capital growth.

Board

In my statement in last year's annual report, I advised that the board
intended to undertake a process of gradual refreshment and in September 2011
we were pleased to announce the appointments of Rod Kent and Robert Woods as
additional independent non-executive directors. John May retired as an
executive director at the half-year, with our grateful thanks for his
contribution to Caledonia's affairs over his eight years on the board.

I myself have served on the board for nearly 17 years, the last three and a
half of which as Chairman following Peter Buckley's sudden death in December
2008. Having overseen the transition of Chief Executive from Tim Ingram to
Will Wyatt and the adoption of a revised strategy, I feel that it is an
appropriate time for me to relinquish the Chairmanship and to step down from
the board, which I propose to do at the conclusion of the AGM in July. The
board has decided to appoint Rod Kent as my successor, a choice with which I
am delighted. Having been Managing Director for many years and Chairman of
Close Brothers from 2006 to 2008, as well as chairman or a non-executive
director of a number of other major companies during his career, Rod brings a
wealth of experience to Caledonia and I wish him all the very best for the
future.

Charles Cayzer will be succeeding Michael Wyatt as Chairman of the Cayzer
Trust Company ('CTCo') when Michael retires at CTCo's AGM in December 2012.
Charles will then retire as an executive director of Caledonia, but will
remain on the board as a non-executive director. He will have been an
executive director for 27 years, having been appointed in 1985, and he has
given valuable service to the company over all those years. As Chairman of
CTCo, which holds 34.2% of Caledonia's shares together with other interests,
he will be taking a leading role in the Cayzer family's affairs. We are
delighted that Caledonia will also benefit from his continued membership of
its board.

Mark Davies, who has been a non-executive director of Caledonia since 2002,
has also signalled his wish to retire from the Board before the end of this
calendar year. However, as this is my last statement as Chairman, I would
personally like to thank Mark enormously on behalf of shareholders for his
wise counsel over the past decade, which will be very much missed.

Outlook

Caledonia's stated strategy is being successfully implemented by our
management team. By the nature of our business and our longer term attitude
to investment, this is a continuing process. For example, the divestment of
non-core assets that are both sub scale and relatively illiquid together with
the subsequent redeployment of the capital realised at attractive valuations,
requires patience. The current economic climate and outlook, especially in
Western economies, is not an easy backcloth against which to achieve these
strategic shifts.

I am confident that the initiatives already undertaken by our management will
enable Caledonia to perform well. Those moves, coupled with the higher
intrinsic value than current market prices of several of our larger quoted
investments, will deliver our shareholders a good return over the longer
term.

James Loudon
Chairman

CHIEF EXECUTVE'S REPORT

Results

The economic backdrop of recession in Europe - in particular, artificially
low interest rates combined with the unprecedented fiscal problems of many EU
countries - has caused investors rightly to be nervous. This was demonstrated
by a flight to the relative safety of cash and bonds in the autumn of last
year, which has left several of our investments trading at significantly
lower valuations as investors have been cautious in respect of equities. More
positively, this has allowed us to deploy capital into our new Income &
Growth pool at reasonable prices.

Caledonia's long term investment approach of taking large stakes in companies
has often resulted in uneven performance, especially when compared with an
index whose composition is less concentrated than our portfolio. Short term
swings in valuation within the portfolio are to be expected and are
acceptable, provided there is not an underlying diminution in intrinsic
valuation of the respective investment. However, a decrease in the net asset
value per share total return ('NAV TR') of 7.0% over the past year has had a
large proportional effect on our five year NAV TR, which has underperformed
our benchmark, the FTSE All-Share TR, by 14.1% over the same period. We have
continued, however, to outperform this index over the past ten years. The
majority of the five year underperformance is due to Caledonia's dividend
pay-out being below that of the market. We are addressing this strategically
through our increased emphasis on income from the portfolio, which should be
reflected in increased dividends to shareholders.

Discount

The discount at which our shares trade compared with our underlying NAV has
widened, ending the year at 25%. This is approaching the level at which many
private equity investment trusts trade and is considerably wider than the
average of the Global Growth sector in which we are categorised. We purchased
 12.6m of shares during the year and we continue to believe that investing in
the existing portfolio through share buy-backs at such a wide discount is
both accretive and good value for all shareholders. We will once again ask
for the necessary permissions to buy in shares at the AGM, though our ability
to conduct such a strategy for a sustained period is constrained by the
holding of the Cayzer Concert Party. However, the real driver of the discount
is the underlying performance of the portfolio which, in recent years, has
been weak. The strategic initiatives to address this were outlined a year ago
and are well underway. We are particularly pleased with the strong
performance of some of the newer investments, which outperformed the
benchmark by 5%. I am confident that this trend will continue and that
shareholders will benefit from an overall improvement in performance.

Strategy

I laid out our strategy in my report a year ago. The core message was that
Caledonia's excellent model of long term supportive capital was as relevant
and fit for purpose as ever, but was in need of certain adjustments.

Our strategy review identified four key areas where we would focus our
attention:

- The yield derived from the portfolio was too low. We have addressed this
both by creating an internally managed Income & Growth pool and through a
more stringent yield requirement. I am pleased to report good progress with
underlying income rising as the portfolio is realigned. We envisage further
progress over the next two years without detracting from Caledonia's core
approach which seeks to invest in growth, rather than dedicated income,
companies. This supports our stated intention to pay a higher dividend to
shareholders, as outlined by the Chairman.

- We had too many subscale investments. Since the strategy was adopted, we
have sold, or are in the process of selling, eight subscale investments and
have identified a further seven for disposal. In addition, management of
three subscale businesses has been transferred to a private equity firm. This
will leave us with a core portfolio of 40-50 investments, which is optimal
for our current management resource and will allow us to keep our ongoing
charges ratio to around 1%. We have implemented a minimum size threshold for
new investments of  10m overall, though listed stakes may be built up over
time, and  20m for unquoted companies. This does not apply to purchases by
the Income & Growth pool, for which the portfolio criteria are by their
nature different.

- A change in the way we manage our portfolio. The portfolio has been
reorganised into six distinct pools of capital managed by investment
executives with relevant experience and skill. There is necessarily an
element of matrix management as several of the pools contain both unquoted
and quoted investments. There is clearer accountability and responsibility as
a result of these changes.

- Our investment and divestment process requires refining.
-- Our new management structure has strengthened our decision making process.

-- The pool structure has added focus and responsibility.
-- The investment size limits have helped refine our research and investment
towards fewer but more suitable opportunities.
-- Our deal flow has been enhanced through increased marketing and specialist
resource.

The yield requirement has seen a subtle shift in our ideal target portfolio
company, resulting in less early stage investments and a move towards a more
mature profile than in the recent past. Our investment criteria are now
focused on a strong market position, strong margins and cash flows, and high
barriers to entry, combined with an established and proven management team.
Companies that possess such qualities are an excellent fit with our style of
investing and will result in less risk with equally attractive return
characteristics, if bought at reasonable valuations.

We have moved away from an absolute requirement for a board seat,
particularly through the Quoted pool. This will result in an increased level
of liquidity as well as holdings in companies with larger market
capitalisation.

The board has signalled its confidence in this strategy by substantially
increasing the final dividend and its intention is to continue Caledonia's
progressive dividend policy, but from this higher level, in the future.

Investment activity

During the year, we invested  248m and realised  130m of assets. The Income &
Growth pool was the principal recipient of funds during the course of the
year, investing  111m at opportune moments in what was a volatile year for
markets. Our strategic aim is to increase the size of this pool to 15 20% of
the portfolio, representing up to a little over  200m, over the next two
years. Excluding the Income & Growth pool, we made eight new and eleven
follow-on investments and fully or partially sold twelve holdings during the
year. Over the year, the returns from all but the Income & Growth pool were
disappointing though, in a volatile market, a concentrated portfolio such as
ours will inevitably experience a greater degree of fluctuation in value. The
underlying financial performance of most of our investments has remained
healthy, so we expect that value will accrue to investors in due course.

The following table summarises the portfolio movements and performance by
pool. The time weighted return takes account of the timing of investments,
disposals and income receipts throughout the year.

[ Table of portfolio movements and performance by pool ]

Pool commentary

Quoted pool. Our solid, bottom-up analysis, married to a value oriented
style, is tailored to the identification of long term equity growth stories.
Four new investments in Spirax-Sarco, The Weir Group, Hill & Smith and Greggs
were made during the year.

Unquoted pool. The portfolio holdings have shown a healthy 16% growth in
underlying profits overall in the year, though valuation metrics have
reduced. We have witnessed excellent deal flow with over 200 opportunities
assessed and have made one new investment - in Bowers & Wilkins, an audio
equipment manufacturer. We have been granted exclusivity in a further deal
and have a healthy pipeline of opportunities.

Asia pool. In the quoted arena, we made investments in Jardine Matheson and
one of its associated companies. In India, our shareholding in First Blue
Home Finance will be merged with another of our holdings, Dewan Housing
Finance, during the next year. We made a new commitment to an Asian fund of
private equity funds.

Property pool. We sold several Edinmore Investments property companies and
assets during the year, whilst Brookshire, the specialist industrial property
team, made several new acquisitions. We added to our holding in London &
Stamford.

Funds pool. We will select manager with top quartile performance records for
both private equity and quoted funds to give us targeted geographical and
sector exposure with a controlled risk/reward profile. We have made further
commitments to private equity funds in the UK and US.

Income & Growth pool. This pool has produced an impressive first year
outperformance, laying solid foundations for future yield and capital
appreciation as well as enhancing our global exposure.

The pool reviews that follow this report provide further details of our
portfolio of investments.

Asset class
We retain an approximate 60:40 split between listed and unlisted companies
which is a slightly higher exposure to quoted companies than last year, but
not dissimilar to our long term average.

[ Table of asset allocation ]

Top five investments

Our largest five investments are shown in the table below. Caledonia has
always taken substantial stakes in companies, often built up over a period of
time. Retaining our successful investments for the longer term has been a key
plank of our investment style, so usually there is relatively little change
in the composition of the top five or ten holdings from year to year. We did
however sell down some of our holding in British Empire Securities during the
year and transferred the funds to the Income & Growth pool. Cobehold is a
privately held Belgian investment vehicle with net assets of approximately
EUR1.2bn in which Caledonia owns a 10% holding. It has invested in a high
quality portfolio of about 15 growth orientated companies, mostly in
continental Europe. It has grown to be our second largest investment and we
continue to see substantial underlying growth from its portfolio, which bodes
well for the future.

[ Table of top five investments ]

Geography

In previous years, we have set out our desire to increase overall exposure to
Asian economies. We have been investing in India for a number of years, but
lacked exposure to the rest of South East Asia. We have therefore selected
two Asian funds of private equity funds to complement our investment in
Capital Today China and have made initial investments in Jardine Matheson and
Hongkong Land. We have also deliberately increased exposure to North America
during the year.

We have followed closely the disturbing announcements by the Indian
government regarding potential retrospective taxation charges. This rhetoric
is making India a less attractive country in which to invest and foreign
investment flows have slowed considerably. We will continue to monitor events
closely, though we view India as a strong long term structural growth story,
albeit with many of the normal attributes of an emerging economy, both good
and bad.

[ Table of geographic distribution ]

Outlook

The corporate sector continues to produce strong results and to nurture
healthy balance sheets. This is in direct contrast to many Western economies,
which are over indebted, underperforming and being kept alive with
artificially created money. Markets remain only fairly valued and are likely
to show volatile movement for some time to come. We will continue to invest
Caledonia's balance sheet with great care and allocate our most precious
commodity, our capital, only to well run and attractively priced companies.

I would like to end by expressing, on behalf of the board, our sincerest
thanks to James Loudon for his hugely significant contribution to the company
over a long period of time and, particularly, for stepping up to Chairman on
the untimely death of Peter Buckley three and a half years ago. We wish him a
long and fulfilling retirement.

Will Wyatt
Chief Executive

BASIS OF PREPARATION

The financial information included in this preliminary announcement has been
computed in accordance with International Financial Reporting Standards
('IFRSs') as adopted by the European Union. However, this announcement does
not itself contain sufficient information to comply with IFRSs. The company
expects to publish financial statements that comply with IFRSs on 19 June
2012.

The financial statements were approved by the board on 24 May 2012.

A copy of the final results announcement is available from the company's
website at www.caledonia.com.
End CA:00223252 For:CDN    Type:FLLYR      Time:2012-05-25 08:30:22