Caledonia Investments plc
Final results for the year ended 31 March 2023
Financial highlights1
| 31 Mar 2023 | 31 Mar 2022 | Change | ||
| Net asset value total return | 5.5% | 27.9% | ||
| Net asset value | 5068p | 5041p | +0.5% | |
| Net assets | £2,798m | £2,783m | +0.5% | |
| Annual dividend per share | 67.4p | 64.8p | +4.0% | |
| 1. | NAV total return, and investment and pool returns are Alternative performance measures. Definitions of these measures may be found at https://www.caledonia.com/invest-with-us/investment-trusts/ | |||
Highlights
| â— | 5.5% NAV total return for the year. Net assets of £2.8bn, after special dividend payment in summer 2022. |
| â— | 4.0% increase in the dividend to 67.4p per share, 56th consecutive year of increase. |
| â— | Private assets, both Private Capital and Funds, were the key drivers of returns in the year. |
| â— | Strong balance sheet with £472m of total liquidity (£222m cash and £250m undrawn facilities). |
| â— | Chief Financial Officer succession announced. |
| Quoted Equityâ—Public equity holdings were adversely impacted by volatility and weakness in global equity markets, with total return of 0.2% in the year. Private Capitalâ—Private Capital portfolio delivered total return of 8.4%, following very strong returns in FY22.â—Majority of portfolio companies demonstrated good progress in terms of both growth and profitability.â—Acquisition of AIR-Serv Europe announced post year end. Fundsâ—Funds portfolio generated total return of 13.3% for the year, supported by 6% weakening of Sterling against the US dollar.â—Strong underlying performance from the North American funds partially offset by weaker Asia fund performance in the year: longer-term performance from both regions remains very strong. |
Mat Masters, Chief Executive Officer, commented:
“Our approach of investing in a diversified portfolio of high-quality companies and funds has generated positive returns over the last year against a challenging market environment.
We have a strong platform from which to continue to deliver our objectives of growth in net assets and dividends paid to shareholders over the long term.”
22 May 2023
Enquiries
| Caledonia Investments plc | Teneo |
| Mat Masters, Chief Executive OfficerTim Livett, Chief Financial Officer | Tom MurrayRobert Yates |
| caledonia@teneo.com | |
| +44 20 7802 8080 | +44 20 7353 4200 |
Chair’s statement
Results
The NAV total return for the year ended 31 March 2023 was 5.5% which, whilst below our long-term target of inflation plus 3% to 6%, compares favourably to the FTSE All-Share return of 2.9% for the same period. This follows strong returns of 27.9% last year, 25.9% in the preceding year and 19.3% annualised over the last three years. Our private assets, in both Private Capital and Funds, generated good returns during the year, based on a mix of positive underlying performance and the advantageous impact of the 6% fall in the value of Sterling against the US dollar. In contrast, our public equity holdings were adversely impacted by volatility and weakness in global equity markets. Our balance sheet remains strong with total liquidity of £472m available at 31 March 2023, reflecting our banking facilities and £222m of cash.
Income and dividends
Investment and other income (revenue account) declined by 15% to £44m and net income was £21m. The gradual reduction in investment income was highlighted last year and we will maintain our focus on total returns rather than pure income from our portfolio. The Funds pool generated a net cash inflow of £24m which, together with net income of £21m, was sufficient to cover our proposed annual dividend. The board is recommending a final dividend of 49.2p per share, which represents a full year dividend of 67.4p, an increase of 4.0% when compared to the previous year. If approved by shareholders, this would represent the 56th consecutive year of increases in our annual dividend.
Board
Will Wyatt, who retired as Chief Executive at last year’s annual general meeting, continues to serve on the board as a non-executive director following re-election by shareholders. Will was succeeded by Mat Masters who has made an excellent start in his new role.
In November, Tim Livett, our Chief Financial Officer, advised the board of his intention to retire and leave the company to develop a portfolio of non-executive roles once his successor joins the board. The search for Tim’s successor very recently concluded with the appointment of Rob Memmott. Rob will join the company and the board on 1 September 2023.
Towards the end of the financial year, we welcomed Farah Buckley as a new independent non-executive director. Stuart Bridges, who has served on the board since 2013, will retire at the forthcoming annual general meeting as planned. Following a period of notable change, the board has asked me to extend my tenure until the annual general meeting in 2025, subject to ongoing approval by shareholders.
On behalf of the board, I would like to thank Tim and Stuart for their contribution to Caledonia.
Strategy
We completed a strategic review during the year. Aside from the small refinements set out in the Chief Executive Officer’s report, we have not implemented any significant changes.
Annual general meeting
I look forward to once again meeting shareholders at our annual general meeting on 19 July.
Outlook
While inflation is at last showing signs of peaking, rising interest rates are a threat to global growth. The recent banking sector issues on both sides of the Atlantic reveal the economic stress lurking in the system after years of ultra-low interest rates. The high levels of government debt, built up since the last financial crisis, have accelerated significantly on the back of pandemic and energy support measures. It may well be that our attention will turn to the underlying deflationary forces from this debt once the current round of fiscal tightening is complete.
As Mat has outlined in his report, we remain confident in our strategy of selecting quality companies and funds which can deliver long-term compounding returns. However, it would not be a surprise to see increased volatility in the year ahead as the impact of rate rises becomes more apparent in the global economy.
David Stewart
Chair
Chief Executive Officer’s report
Purpose
Caledonia’s purpose is to grow the real value of net assets and dividends paid to shareholders over the long term, whilst managing risk to avoid the permanent loss of capital. We pursue this through a strategy of taking a long-term approach, identifying and investing directly, and indirectly via funds, into well-managed businesses. The company is self-managed and, investing from our own balance sheet, we do not seek to raise new funds so can remain focused on investing without compromising our investment process.
I succeeded Will Wyatt as Chief Executive Officer during the year, having previously held the position of Head of Quoted Equity. I am privileged to work with exceptional colleagues who share the same values of conducting business to the highest standards coupled with a long-term horizon.
Strategy and allocation
Our three investment pools provide a clear structure for managing specialist teams and risk diversification. Each investment team is able to focus on a concentrated portfolio which, in combination, provide a good level of diversification for our shareholders.
Over the course of the year, we completed a strategic review to ensure that we maintain our focus on investments capable of delivering our long-term objectives and continue to execute well via our three pools, supported by our distinctive culture. Aside from the minor adjustments outlined below, we have not implemented any significant changes.
To enable our investment teams to continue to invest in quality businesses we have reduced the overall income requirement. We have not changed Caledonia’s strategic aim of growing the dividend over time but have revised the company’s dividend policy. Caledonia has very high levels of retained reserves available to pay the dividend with little requirement for earned income to provide dividend cover. However, ensuring cash flow cover to meet operational costs and dividend payments without recourse to the investment portfolio is prudent. The Funds pool has reached its strategic allocation target, delivered returns above the average for the group, with a portfolio of sufficient scale to appropriately manage risk and has reached a stage of maturity where we anticipate positive cash flow. We have therefore moved from an income cover policy to one where half of Caledonia’s costs and normal dividend is covered by income from the investment portfolio and the remainder from net cash inflow from the Funds pool.
In 2019 we reduced the income target for the Income portfolio from 4.5% on value to 3.5% on cost. Moving from measuring yield on value to cost enables investment in good quality companies when the market presents opportunities, without the need to sell when share prices subsequently recover. This reduction in yield requirement expanded the opportunity set and further enabled the team to focus on quality. The change led to the disposal of several potentially riskier, lower quality assets over the winter of 2019 and early 2020 before funds were reinvested into higher quality companies during the period of market volatility brought on by the Covid-19 pandemic. We have recently made a similar reduction to the income target for the Private Capital pool from 5% on value to 2.5% on cost. A summary of each pool, together with return requirement and revised income target, is shown below.
| Pool name | Description | Return requirements |
| CaledoniaQuoted Equity | Capital strategy Income strategy | 10% total return,no yield target7% total return,3.5% yield (on cost) |
| CaledoniaPrivate Capital | Majority and minority investments predominantly in UK mid-market companies with equity values of between £50m and £150m | 14% total return,2.5% yield (on cost) |
| CaledoniaFunds | US and Asian private equity funds and funds of funds | 12.5% total return |
We have also refined the asset allocation model, with the following new bandings.
| Pool name | New | Old |
| % | % | |
| Quoted Equity | 30-40 | 35-50 |
| Private Capital* | 25-35 | 35-45 |
| Funds | 25-35 | 20-30 |
*includes Cobepa
The most significant change was a reduction to Private Capital’s allocation range, which supports a portfolio of six to eight holdings at an average entry equity value of around £100m, together with our existing investment in Cobepa. We also adjusted the allocation to the Funds pool to facilitate a small increase in our exposure to US lower mid-market private equity funds which have shown strong, reliable performance over time.