CDN
31/05/2013 08:30
FLLYR
REL: 0830 HRS Caledonia Investments Plc
FLLYR: CDN: Results for the year ended 31 March 2013
HIGHLIGHTS
- Strong 2012/13 performance. Net asset value per share total return for the
year ended 31 March 2013 was up 18.9%, driven by strong capital gains and a
growing income stream.
- Ten year performance record. Since becoming an approved investment trust in
2003, Caledonia's NAV total return was 201.7%, outperforming the FTSE
All-Share Total Return by 26.4%.
- Portfolio delivering long term outperformance. Rebalanced portfolio aimed
at delivering long term outperformance for today's markets.
- Improving portfolio yield. The company has successfully increased its
portfolio income profile over the last two years to produce a portfolio yield
of 3.3% at 31 March 2013, broadly in line with market averages.
CHAIRMAN AND CHIEF EXECUTIVE'S REPORT
Results
We are pleased to report a successful year for the company, which has
delivered strong performance built on the strategic initiatives implemented
over the past three years. Net asset value ('NAV') per share total return
increased by 19%, driven by gains across our investment portfolio and a
growing income stream. The board is recommending an overall dividend for the
year of 47.2p per share, an increase of 10% over last year reflecting greater
income generation following the portfolio rebalancing. This has enabled us to
increase the dividend by 34% over the last three years and the current year's
dividend will represent the 46th consecutive annual increase for
shareholders.
The year has seen considerable changes, with a reduction in exposure to a
single company or sector, an improvement in portfolio liquidity and the
inclusion of a greater proportion of mature income generating assets. We have
a 96m cash reserve to take advantage of new investment opportunities and to
provide downside protection. The sale of subscale investments and the
increased emphasis on income, combined with an increasing move away from
reliance on the UK market and economy, has reshaped our portfolio. This has
been achieved without relinquishing Caledonia's core values, namely to take
the longer view and to select and support good management teams.
Caledonia offers a distinctive proposition for its shareholders, compared
with other investment trusts. We have the Cayzer family as a large
shareholder, holding some 48% of the shares, and members of the family fulfil
key management roles. We therefore seek to manage wealth on a generational
time scale. We also seek to pay a consistently rising dividend.
This long term view influences the shape of the investment portfolio. Some
38% of our assets are invested in unquoted situations, which require a longer
investment horizon, but which we believe will, when well selected, produce a
higher overall return than most quoted investments. In addition, we are able
to take a longer term view of some of the rapidly growing markets in the
world, such as Asia, which, despite their greater short term volatility, will
grow faster over time.
Performance
In view of the above, the board has decided to cease using a one-year
benchmark to measure progress. Except by coincidence, Caledonia's portfolio
will not perform in the short term close to or in line with the FTSE
All-Share index or any other index. What is relevant is that over the last
ten years (a period which also coincides with our status as an investment
trust), our NAV total return (i.e. capital plus dividends reinvested) has
increased by 202%, outperforming the FTSE All-Share Total Return index, which
increased by 175%. We consider this to be an appropriate index against which
to compare Caledonia over the longer term, although we will keep this under
review as our portfolio becomes increasingly international.
Our relative performance over the last five years has not been so good,
although this timeframe includes the tumultuous events of the Global
Financial Crisis ('GFC'), in the aftermath of which we have undergone a
rebalancing of the investment portfolio and its risk profile.
Income
Income is a core feature of our long term investment proposition. During the
year, 38m was derived from the portfolio, a 13% increase, representing a
portfolio yield of 3.3%. It is our intention to maintain this structural
level of income in the future.
Cash
By taking advantage of rising markets, we have built up a cash reserve of
96m, which represented 7% of net assets at the year end, from a position of
net debt of 37m at the beginning of the year. In the volatile climate we are
currently experiencing, we believe that cash is an important part of asset
allocation, as this provides us with both downside protection and the
flexibility to react quickly. In addition, we have recently renewed our
committed five year bank facilities, although we have reduced the overall
facility amount from 100m to 75m in view of our current cash position. These
facilities remain undrawn and, together with our surplus cash, provide
substantial resources to deploy opportunistically when targeted investments
come within our identified value range. We feel that this is the correct way
to be positioned, despite the allure of cheap long term debt currently on
offer. Some of our portfolio companies have their own debt, which we monitor
regularly. Such debt is generally kept at prudent levels and is substantially
lower than three years ago.
Portfolio
The top ten investments in total account for 43% of net assets. This year has
demonstrated the value of holding long term positions in high quality,
established companies, with the top ten holdings contributing significantly
to performance. However, the portfolio is now more liquid and less
concentrated than in recent times, as we have sold down some of our larger
holdings. Cobehold, our second largest investment, is itself an investment
company and has a diversified portfolio of 15 predominantly European
holdings.
Our investment portfolio provides shareholders with a well-balanced spread of
exposures to differing geographies. Of note is the increase in our US
exposure, now at 16% compared with 7% three years ago, a trend we intend to
continue. There will always be a substantial part of the portfolio invested
in the UK, as our home marketplace dictates that the UK is our main source of
deal flow, particularly in unlisted companies. When we analyse the portfolio
by geography of revenue generation, we estimate that our exposure to sterling
is about 45%, 18% to the euro and 15% to the US dollar, with the Asian
currencies making up the bulk of the remainder.
Investment and divestment activity
We invested 142m during the course of the year, including 29m of new capital
in the Income & Growth pool, as we continued to build its position within the
overall portfolio in order to gain further exposure to global businesses with
strong and growing dividends. It is notable that the Income & Growth pool has
itself outperformed the FTSE All-Share index over the two years since its
formation. We made one significant acquisition in the Unquoted pool during
the year, a portfolio of five US industrial businesses, an investment
totalling $42m (27m pounds). We made several new commitments to private
equity funds, in particular to give us diversified exposure to geographies
where we are less willing to invest directly.
We took advantage of the run up in stock markets in the second half of the
financial year to sell over half of our holding in Close Brothers, the UK
based merchant bank. This has reduced our holding from 13% of net assets last
year to a more balanced 7%, in line with our strategic target for individual
investment exposure. We completed the sale of our stake in Celerant
Consulting from the Unquoted pool, realising 46m (including 11m of accrued
loan interest), an excellent 2.5x return on cost. In addition, we sold the
remainder of our holding in British Empire Securities for 49m, which has been
a good investment for shareholders, returning over nine times the capital
invested over a 21 year period. Overall, 310m was realised from investment
sales during the year.
Overview of pool performance
We moved during the year to managing the portfolio in four pools, integrating
the Asia and Property pools with the remaining four. This has removed the
sector and geographic overlap and completes the strategic realignment of our
investments into pools of capital clearly defined by investment type.
Overall, the increase in net assets was driven by a particularly strong
performance from our listed investments in Caledonia's traditional Quoted
pool and our more recently established Income & Growth pool, which both had a
total return in excess of 20% over the year.
[ Table of portfolio movements and performance by pool ]
Quoted (517m, 40% of net assets)
We look to invest in companies over the long term with established business
models, strong balance sheets and good returns on capital and invested
equity.
There were notably strong performances by Bristow Group, AG Barr and Close
Brothers, as well as from some of the newer investments such as Weir Group,
Spirax Sarco and Jardine Matheson. Bristow has grown significantly in value
over the year and is now the largest holding in the portfolio. It is
continuing to expand its business geographically and recently won the search
and rescue contract from the UK Government covering the coastline of the UK
that, after an initial transition period, will involve a $2.5bn, ten year
contract utilising 22 helicopters and hundreds of personnel. Markets finally
gave Close Brothers the rating it undoubtedly deserves, being one of the very
few banks to have come through the GFC with a clean bill of health. It has
continued to grow its lending book profitably without taking undue risks, and
we took advantage of this rise in valuation to sell over 100m of shares
during the period and to reduce the size of this investment in relation to
the portfolio. AG Barr, the maker of carbonated drinks such as Irn-Bru,
enjoyed another year of strong underlying growth whilst attempting to
consummate a merger with Britvic, which has been referred to the Competition
Commission. London & Stamford and Metric Properties, both property companies,
finalised their merger which leaves the combined company, LondonMetric, well
capitalised and with greater depth of management. Quintain Estates enjoyed a
welcome narrowing of its discount to NAV after attracting an Asian joint
venture partner to finance the building of its Greenwich Peninsula site.
Unquoted (348m, 27% of net assets)
We look to invest in unlisted businesses requiring capital and an investor
with a balance sheet to support a long term perspective. We invest in both
minority and majority positions.
The Unquoted pool achieved a total return of 18%, helped by the realisation
of our investment in Celerant Consulting. This exit was matched by an
investment in a group of US industrial companies, the Latshaw Group, that is
performing ahead of our expectations. We have been actively reviewing other
potential acquisitions and continue to see a strong flow of potential
investments, several of which are proprietorial in nature. We hope to secure
at least one of these for the portfolio in the current financial year.
The remainder of the portfolio has solid growth prospects. The pool's
management team has worked hard during the year with the portfolio to
increase profitability, which has occasionally required more finely balanced
decisions such as leadership change or a move to a realisation strategy. We
anticipate further M&A activity during the current year, which may result in
the sale of one or two holdings.
Funds (167m, 13% of net assets)
We invest in both private and public equity funds, with an emphasis on
providing exposure to areas of the world where we are less willing to invest
directly.
The Funds pool completed the sale of British Empire Securities during the
year. Several new commitments were made to private equity funds in the US and
Asia although, overall, distributions exceeded drawdowns. We also hold
interests in funds that invest in quoted securities, utilising specialist
knowledge to gain exposure to areas of the world where it is more difficult
for Caledonia to invest directly. The largest of these is Perlus, a US
micro-cap value investor, which had another strong year.
Income & Growth (162m, 12% of net assets)
The portfolio is comprised of shares in 42 international businesses, which
provide a reliable and growing dividend. Cash flow returns to shareholders
are prioritised in the invested businesses.
The Income & Growth pool's performance in the year was excellent, achieving a
total return of 24%. This is a creditable result considering the pool's 5%
yield target though, of course, markets are being given impetus from
investors hungry for income. The pool provides Caledonia with both a
diversity of income and, more importantly, exposure to successful businesses
that operate on a global scale. We added a net 29m of capital to the
portfolio during the year and anticipate adding to the pool again during the
current year as it approaches its target size of 15% to 20% of NAV.
Share buy-backs
We continued our share buy-back policy during the year, buying and cancelling
1.1m shares, about 2% of the issued share capital, at a cost of 18m. With the
discount still around 20%, this represented good value for all shareholders
and we will once again seek the necessary shareholder approvals at the
forthcoming AGM to continue with these buy-backs for a further year.
Dividend
The board is recommending shareholder approval of a final dividend of 34.3p,
an increase of 10%, which would result in an equivalent increase in the total
dividend for the year from 42.9p to 47.2p per share. This would be the 46th
consecutive year of increases in our annual dividend and a rise of 34% over
the last three years. The final dividend will be paid on 8 August 2013.
Board
The non-executive side of the board has seen several changes over the year.
Rod Kent took over from James Loudon as Chairman after the AGM in July 2012.
James became Chairman in 2008 amidst difficult circumstances and steered the
company and its subsequently appointed Chief Executive with great wisdom
throughout the period of his Chairmanship. Mark Davies, who had served as a
non-executive director on the board for ten years, stood down in December
2012, at which time Charles Cayzer also moved to a non-executive role. Stuart
Bridges, who is the Chief Financial Officer of Hiscox, was appointed as a
non-executive director in January 2013. He will take over as Chairman of the
Audit Committee from David Thompson, who will retire from the board at the
AGM in July, having served as a non-executive director for ten years. We
thank him and Mark Davies for their contributions on a wide range of issues
over the years.
On the executive side, the directors are supported by an impressive team of
associate directors, who have executed the new strategy well and performed
cohesively as a management team. We thank them, and all our staff, for their
efforts and success during the year.
Outlook
Economic growth in developed markets is proving to be slower than governments
would like, but in response central banks globally are cutting rates to
historically low levels to stimulate growth, though with modest success. Thus
a degree of stability has been created to allow time to deal with structural
problems. Unprecedented printing of money via quantitative easing ('QE')
allied with competitive currency devaluations is causing equity markets to
rise and bond yields to fall, creating a wealth effect. Bond market
valuations look stretched and equities have now recovered to be fair value,
or modestly above in some cases. This leaves little room for disappointment
by companies if economic growth does not pick up as we enter 2014. Central
bank initiatives via QE are driving holders of cash to reinvest in risk
assets due to negligible bank interest rates, which leave markets vulnerable
to the eventual withdrawal of QE stimulus. Inflation remains the key risk
that could derail current stimulus efforts, though is probably some way off.
Markets are responding positively to policy initiatives at the current time,
but clearly remain vulnerable to the efforts of previously untested economic
tools unless economic growth gains traction in the coming year.
The actions we have taken over the last three years have ensured that we have
a balanced portfolio tailored to our shareholders' requirements to deliver
long term outperformance in the current macroeconomic environment.
Rod Kent
Chairman
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 21 June
2013.
The financial statements were approved by the board on 30 May 2013.
A copy of the final results announcement is available from the company's
website at www.caledonia.com.
End CA:00236905 For:CDN Type:FLLYR Time:2013-05-31 08:30:38
