Caledonia Investments plc
Half-year results for the six months ended 30 September 2023
Financial highlights
| 6 months | Year | ||
| 30 Sep 2023 | 31 Mar 2023 | Change | |
| Net asset value per share total return* | 3.7% | 5.5% | |
| Net asset value per share* | 5203p | 5068p | +2.7% |
| Net assets | £2,876m | £2,798m | +2.8% |
| Interim dividend per share | 18.9p | 18.2p | +4.0% |
*Alternative Performance Measure (please refer to Glossary of terms and alternative performance measures at end). Net asset value per share referred to throughout is calculated on a diluted basis.
Highlights
| – | +3.7% NAV total return (“NAVTR”) for the six months, with all parts of the portfolio contributing to growth. |
| – | Caledonia Public Companies returned 2.8%, following mixed performance of global public equity markets. |
| – | Caledonia Private Capital returned 5.9%, predominantly driven by the agreed sale of Seven Investment Management (“7IM”). AIR-serv Europe was acquired in April 2023 for £142.5m. |
| – | Caledonia Private Equity Funds returned 4.6% with modest valuation growth across both North American and Asian private equity funds. |
| – | Final dividend of £27m (49.2p per share) paid to shareholders in August 2023, in respect of the year ended 31 March 2023. |
| – | Progressive dividend maintained, with the interim increased by 4.0% to 18.93p per share. |
| – | Strong balance sheet. Total liquidity position remains healthy, with undrawn facilities of £215m at 30 September 2023 and anticipated cash proceeds of c.£255m from the upcoming disposal of 7IM (net of transaction expenses). |
Mat Masters, Chief Executive Officer, commented:
“We delivered a good return in the first half of the year against a backdrop of continued market volatility, demonstrating the benefits of our diversified portfolio. We have remained active in our approach to enhancing shareholder value, demonstrated by the successful acquisition of AIR-serv Europe, together with the agreed disposal of 7IM with anticipated returns at the top end of our target range.
The global economic outlook remains challenging, with ongoing volatility influencing short-term performance. However, we believe our long-term outlook and focus on investing in high-quality, well-financed and managed companies, underpinned by our strong balance sheet, leaves us well-placed to continue delivering strong long-term returns in line with our aims.”
21 November 2023
A presentation for analysts will take place at 11 am, with live webcast available via this link.
Enquiries
| Company contacts | |
| Caledonia Investments plc | |
| Mat Masters | +44 20 7802 8080 |
| Chief Executive Officer | |
| Rob Memmott | |
| Chief Financial Officer | |
| Media contacts | |
| Teneo | |
| Tom Murray | +44 20 7353 4200 |
| Robert Yates | |
| caledonia@teneo.com |
Management report
Results
Caledonia’s NAVTR for the six months to 30 September 2023 was 3.7% with net assets at the period end totalling £2,876m. The NAVTR for the 12 months to 30 September 2023 was 4.6%. Revenue income for the half year increased 33% to £33.8m largely due to an £8.6m dividend received from retained private equity fund income distributions. Net debt at the period end (comprising external borrowings of £35m and cash of £15m) was £20m (31 March 2023: net cash of £222m) principally due to investments, including the £143m acquisition of a majority stake in AIR-serv Europe, a leading supplier of forecourt vending equipment. Total liquidity remains healthy with undrawn bank facilities of £215m (31 March 2023: £250m).
During the period the Company repaid £211.2m on a loan facility with a wholly owned subsidiary. The wholly owned subsidiary subsequently distributed £212.1m, with minimal impact on group cash.
The directors have declared an interim dividend of 18.93p per share, an increase of 4.0% compared with the previous year.
The tables below show Caledonia’s performance track record and asset allocation to 30 September 2023:
Performance record
| 6 months | 1 year | 3 years | 5 years | 10 years | |
| % | % | % | % | % | |
| NAVTR | 3.7 | 4.6 | 59.4 | 63.2 | 183.8 |
| Annualised | |||||
| NAVTR | 4.6 | 16.8 | 10.3 | 11.0 | |
| CPI-H | 6.4 | 6.0 | 4.1 | 2.8 | |
| NAVTR vs CPI-H | -1.8 | 10.8 | 6.2 | 8.2 | |
| FTSE All-Share Total Return | 3.7 | 5.6 | |||
| NAVTR vs FTSE All-Share Total Return | 6.6 | 5.4 |
All three pools generated good, positive returns in the first half of the year. The impact of foreign exchange rate movements was limited, with Sterling weakening by 1.3% against the US dollar and strengthening by 1.3% against the Euro in the period.
The Public Companies pool produced a return of 2.8%, reflecting the mixed performance of global public equity markets. The Private Capital portfolio produced a return of 5.9% following the biannual revaluation of our holdings, reflecting the contractually agreed disposal of 7IM and that most of the investee businesses are performing well. The Private Equity Funds portfolio returned 4.6% based on modest valuation growth across both our North American and Asian private equity funds, although there has been a notable slowdown in the level of fund distributions in the period reflecting reduced market transaction activity.
Asset allocation
| Net assets allocation | Return | |||
| Strategic | Sep 2023 | Mar 2023 | target | |
| % | % | % | % | |
| Public Companies | 30-40 | 30 | 30 | 9.0 |
| Private Capital | 25-35 | 36 | 29 | 14.0 |
| Private Equity Funds | 25-35 | 33 | 31 | 12.5 |
The movement in asset allocation recorded in the first half of the year is a combination of the relative performance of each pool, as explained below, together with the net impact of investment and disposal activity.
Caledonia has continued to invest in and dispose of assets, in line with our active approach to portfolio management. The movement in net debt in the first half of the year was £242m, largely reflecting net investments made by all three investment pools, and, most significantly, the acquisition of a majority stake in the European division of AIR-serv Europe in April 2023 by Private Capital. The Public Companies pool made significant additions to its holdings in three companies, refined positions in a number of others and reduced positions in two high performing stocks, resulting in a net investment outflow of £17m. The Private Equity Funds pool has seen an increased level of drawdowns, including the purchase of secondary positions in two Decheng Private Equity Funds at attractive levels of discount, and only modest fund distributions, resulting in a net cash outflow of £50m in the period.
Performance for the first half of the year is summarised in the table below.
Pool performance
| 31 Mar | Invest- | Realis- | Gains/ | Accrued | 30 Sep | |||
| 2023 | ments | ations | losses | income | 2023 | Income | Return3 | |
| £m | £m | £m | £m | £m | £m | £m | % | |
| Public Companies | 836.9 | 41.2 | (24.7) | 11.5 | – | 864.9 | 12.0 | 2.8 |
| Private Capital1 | 824.0 | 157.1 | (0.3) | 44.2 | 2.1 | 1,027.1 | 11.6 | 5.9 |
| Private Equity Funds | 873.8 | 64.5 | (14.8) | 39.6 | – | 963.1 | 1.5 | 4.6 |
| Portfolio investments | 2,534.7 | 262.8 | (39.8) | 95.3 | 2.1 | 2,855.1 | 25.1 | |
| Other investments2 | 260.2 | 4.9 | (208.1) | (7.1) | – | 49.9 | 8.7 | |
| Total investments | 2,794.9 | 267.7 | (247.9) | 88.2 | 2.1 | 2,905.0 | 33.8 | |
| Cash and other | 3.1 | (28.9) | ||||||
| Net assets | 2,798.0 | 2,876.1 | NAVTR | 3.7 |
| 1. | The Private Capital valuation at September 2023 includes £3.3m of accrued income (March 2023: £1.2m), and £248.5m classified as an Asset Held for Sale in the Consolidated Statement of Financial Position as at 30 September 2023, relating to the agreed sale of 7IM. |
| 2. | Other investments comprised legacy investments and cash and receivables in subsidiary investment entities. The £208.1m realisation principally reflects a capital re-organisation, followed by a return of capital by an investment subsidiary. |
| 3. | Returns for investments are calculated using the Modified Dietz methodology and the return is Caledonia’s NAVTR. |
Caledonia Public Companies – Capital and Income portfolios (30% of NAV)
The total return on the Public Companies pool was 2.8% over the first half of the year. This outcome reflected the mixed performance of major markets during the period with technology stocks being in favour and US indices moving more positively than the UK, together with muted performance in Asia.
The Capital portfolio delivered a return of 4.6%. Key stocks Hill & Smith, Charter Communications, Microsoft, Oracle and Watsco delivered very strong returns ranging from 10% to 30%, in contrast to the first half of the previous financial year. However, these gains were partially offset by notable price reductions for Croda International, Spirax Sarco, Texas Instruments and Thermo Fisher Scientific.
The Income portfolio delivered a return of -2.2% with the majority of holdings recording adverse share price movements. These adverse returns were partially offset by stronger performance from RELX, Watsco and Sabre. The performance of Sabre reflects premium growth following a difficult trading period last year.
Holdings were increased in Symrise, Croda International and RELX. We sold down a portion of our holdings in Oracle and Watsco, following a period of strong share price appreciation. Other activity was restricted to refining positions in existing investments resulting in our Income portfolio moving closer to its target of £250m of invested cost.
Caledonia Private Capital (36% of NAV)
The Private Capital portfolio generated a total return of 5.9% in the first half of the year.
Caledonia’s Private Capital strategy is focused on high-quality, UK mid-market companies. We take a long-term approach that aims to deliver enduring value throughout the business cycle, enabling us to give these businesses time to fulfil their potential and only sell when the time is right to maximise value.
Caledonia’s Private Capital portfolio is dominated by significant positions in five UK-centric businesses and one private European investment company. These six investments represent over 90% of the pool’s value. Investee companies are revalued in March and September each year. The portfolio generated a total return of 5.9% in the first half of the year. The five UK centric businesses are well-established and have strong market positions. With the exception of Cooke Optics, which has been impacted by temporary industry issues as outlined below, all are growing, profitable and cash generative.
Investee companies are revalued in March and September each year. Excluding 7IM, the remaining four businesses are valued on an earnings multiple basis, with multiples in the range 9 to 14 times current year earnings. AIR-serv Europe was acquired in April 2023 and is valued on a transaction basis using cost of recent investment. Gearing levels are modest, with net debt of approximately two times earnings before interest, tax, depreciation and amortisation (“EBITDA”).
In early September 2023, Caledonia announced that we had agreed terms for the sale of our majority stake in 7IM, a vertically integrated retail wealth management business, to Ontario Teachers’ Pension Plan Board. The transaction is subject to change in control approval by the Financial Conduct Authority and is expected to complete by early 2024. Subject to the exact timing of completion, we expect to receive cash proceeds of c.£255m, net of transaction expenses, for the sale of our ordinary and preference shares in 7IM. The valuation at the end of September of £248m, reflects expected cash proceeds less a 3% discount to equity value in recognition of the very limited degree of transaction execution risk. To reflect this transaction, this asset was disclosed as held for sale on the condensed group statement of financial position as at 30 September 2023. 7IM generated a return of 28.0% in the first half of the year.
Cobepa, the Belgian based investment company, owns a diverse portfolio of private global investments. The majority of the businesses within the Cobepa portfolio continue to develop well, with many delivering strong performance and valuation progression. Two significant disposals, one of which completed in the period, have been agreed which, together with progress from portfolio companies, supported the overall modest uplift in valuation. The valuation of Caledonia’s holding of Cobehold, the holding company of Cobepa, was £179m at the end September, a return of 3.1% for the first half of the year.
Stonehage Fleming, the international multi-family office, continues to deliver good earnings growth across both the Family Office and Investment Management businesses. The former has seen a positive combination of new client wins and increased activity levels with existing clients; the latter has felt the benefit of recovering equity markets. The valuation at the end of September was £157m, a return of 11.7% for the first half of the year.
AIR-serv Europe, a leading designer and manufacturer of air, vacuum and jet wash machines, which it provides to fuel station forecourt operators across the UK and Western Europe, was acquired in April 2023. The business is trading well with earnings slightly ahead of expectations and demonstrating good year on year growth. The valuation has been maintained at the equity purchase cost of £143m, generating no return for the period. The position will be reviewed in March 2024.
Liberation Group, an inns and drinks business with a pub estate stretching from Southwest London to Bristol and the Channel Islands, has traded slightly below expectations through the spring and summer. It has been adversely impacted by the cost-of-living crisis reducing consumer discretionary incomes, sustained cost inflation (particularly UK energy costs) and poor UK weather affecting peak early-summer trading months. However, the integration of the Cirrus Inns business, whilst not complete, has progressed well. The valuation at the end of September was £135m, a return of 2.3% for the first half of the year.
Cooke Optics, a leading manufacturer of cinematography lenses, has been heavily impacted by the Hollywood writers’ strike which started in early May 2023 and the subsequent actors’ strike. With film and TV production severely affected, Cooke has seen a subsequent fall in sales and a resulting reduction in earnings. We anticipate that these industrial disputes will be resolved, with the writers’ strike appearing to have concluded recently, and product demand will return. However, the timing and nature of a recovery in financial performance is uncertain. This is reflected in our valuation at the end of September of £102m, which includes a 15% equity discount to reflect this matter. The equity return is -22.7% for the first half of the year.
Caledonia Private Equity Funds (33% of NAV)
The total return on the Private Equity Funds pool was 4.6% for the first half of the year, including a 1% favourable impact from exchange rate movements. Underlying performance reflects modest valuation growth from holdings across the pool in both North America and Asia, with local currency returns of around 4% and 1% respectively.
Caledonia’s fund investments are principally in third party managed private equity funds operating in North America and in Asia. The North American based private equity funds invest into the lower-mid market, with a focus on small to medium sized, often owner-managed, established businesses. These funds normally provide the first institutional investment into these businesses, and support their professionalisation and growth, both organically and through M&A activity. The entry pricing levels are relatively modest and there is a deep, robust market for future divestment, either via trade sales or to other, larger private equity private equity funds. The portfolio is a combination of directly owned funds (45% of Private Equity Funds NAV), with a broad range of managers generally managing funds in the range of US$250m to US$500m. The balance is in fund of private equity funds investments (13% of Private Equity Funds NAV) with HighVista Strategies (formerly Aberdeen), our largest single manager exposure, over five separate funds.
In contrast, our Asian based funds invest across a wide range of sectors with a focus on businesses in the early years of significant growth, having successfully developed their business model. Whilst focused on local markets, a number, particularly those with a healthcare focus, also invest into the US. The market is less developed than in North America with divestments, in the absence of a mature buyout market, mainly through an IPO or trade sale. The portfolio is a combination of directly owned funds (24% of Private Equity Funds NAV), with a broad range of managers, some sourced through our fund of private equity funds relationships but mostly through our own knowledge and contacts in the region. The balance (18% of Private Equity Funds NAV) is invested with Asia Alternatives, Axiom and Unicorn, all fund of private equity funds providers.
During the first half of the year, £52m was invested via drawdowns, £13m was invested in the secondary purchase of two Decheng funds positions and distributions of £15m, evenly balanced between North America and Asia, were received. The level of distributions has declined compared to the last two years, reflecting more challenging market conditions. We anticipate, based on feedback from our managers, something of a recovery in distributions over the next six to eighteen months.
Management and Board
Rob Memmott joined the board as Chief Financial Officer on 1 September 2023, succeeding Tim Livett.
Dividend
The board has declared an interim dividend of 18.93p per share, an increase of 4.0% on last year’s interim. This will be paid to shareholders on 4 January 2024.
Outlook
The global economic outlook continues to be challenging with the impact of high rates of inflation, elevated interest rates and central bank debt reduction leading to mixed performance across global markets. These factors may influence the short-term performance of our portfolio but Caledonia’s long-term outlook and ethos of investment in high quality, well-financed and managed companies, leaves us well-placed to withstand these pressures and deliver long-term returns in line with our aims.