Caledonia’s net asset value per share total return was 18.0% for the year ended 31 March 2017, following 2.6% for the previous year. All four of its investment pools produced double digit returns. Investment income for the year was GBP47.3m, a fall of GBP3.4m compared with the unusually high level of the previous year. Additionally, following a number of portfolio realisations, in particular the successful sale of Park Holidays, the board is proposing a special dividend of £1 per share to be paid alongside an increased final dividend for the year. The latter would mark the 50th year of consecutive increases of their annual dividend. They say that they are both proud of this achievement and determined to extend the record for many years to come.
Currency gains contributed 6% of the 18% total return for the year. Private equity markets have also been buoyant, as demand for high quality businesses from funds with huge available resources have driven prices to levels not seen since before the financial crisis. They took advantage of this by selling several holdings.
The investment pools returned 20.7% for the year under review. It was a year of net divestment, with GBP418m of sales excluding movements within the Income pool. Alongside the GBP197m received from the sale of Park Holidays, they received significant proceeds from the sales of Bowers & Wilkins, Close Brothers and Capital Today China, the Chinese private equity fund that backed JD.com from a start-up. Excluding movements within the Income pool, they invested GBP230m over the past year, including GBP74m in the Liberation Group, the Channel Islands and UK based pub and brewing company. In addition, over GBP100m was invested in their private equity and quoted market funds in Asia and the US.
Quoted pool (GBP468m, 25% of net assets)
The Quoted pool produced a return of 20.6% for the year. Strong investment gains were made by nearly all of the 18 core holdings that make up the portfolio. UK engineers Spirax Sarco and Hill & Smith were beneficiaries of the fall in sterling but also produced excellent underlying results, which were reflected in strong share price performance over the year. Hill & Smith has finally gained the recognition of the market for its consistent growth in earnings and high margins. The US holdings, such as Microsoft, Philip Morris, Becton Dickinson and Flowserve, were notable performers, as was Jardine Matheson, which operates predominantly in Southeast Asia.
They sold holdings in Close Brothers and LondonMetric Properties, amongst others. Close Brothers remains a high quality and well run bank, but we believe that the valuation and point in the cycle gave reasons for concern. They first invested in Close Brothers in 1987 and it became a outstanding creator of value for Caledonia’s shareholders, producing an IRR over 30 years of 16.4%. Bristow Group, the US helicopter operator, had another year of poor investment returns. The oil and gas industry is currently in a cyclical downturn and, despite the company’s search and rescue contracts, helicopter usage remains low. Two new holdings were instigated this year, but valuations remain high so other targeted companies in which they would like to invest continue to trade outside their price ranges.
Income pool (GBP216m, 11% of net assets)
A portfolio of global equities that produces a reliable and increasing income stream. The Income pool produced a creditable return of 17.0% for the year, including a 4.8% dividend yield. Despite the increase in capital value which has led to a fall in the market yield, they have increased the running yield on the portfolio to 4.8% from 4.2% in the previous year. The portfolio consists of 22 companies and has produced an annualised return of 7.9% over the past two years and 9.6% since inception in 2011. The Brexit vote impacted a number of the portfolio companies that have businesses which operate solely in the UK, such as Royal Mail and Greene King. These are well balanced however by US and European holdings.
Unquoted (GBP568m, 30% of net assets)
The Unquoted pool performance of 20.8% for the year comprised a capital return of 17.7% and an income return of 3.1%. The undoubted highlight was the sale of their 81.5% stake in Park Holidays to Intermediate Capital Group. They received cash proceeds of GBP197m which, when added to dividends received, represented 2.9x our original investment and an IRR of 44%. This company was a good fit with their investment criteria, was run by a very capable team of experienced managers and was one that, in normal circumstances, they might have held for considerably longer. However, they judged that the strong profits growth during the period of ownership combined with high valuations for quality companies were compelling reasons to sell. They also sold our holding in Bowers & Wilkins and a number of smaller legacy assets during the year. Total sale proceeds and income received was GBP262m for the year.
They made one new investment – Liberation Group in July 2016. They invested an initial GBP71m for a 97.9% equity stake (management own the remainder), valuing the company at GBP118m in total. Liberation Group is a pub, restaurant and drinks business with its roots in the Channel Islands. In 2015, it purchased the Butcombe brewery together with a number of pubs in South West England. It had 100 pubs in total on acquisition and the strategy is to expand the number of pubs on the mainland from the Bath/Bristol area to the south west along the axis of the A303. They were attracted to the combination of a solid asset backed business in which they can continue to invest capital at a good rate of return in the future. It is managed by an experienced team from the industry and they have hit the ground running, buying nine pubs since our acquisition.
The existing Unquoted pool portfolio has traded broadly in line with budget during the year. Of particular note is the performance of Seven Investment Management, which has increased assets under management and profits ahead of budget, and Gala Bingo, which has traded in line with expectations at the time of the acquisition 18 months ago. Cobepa produced a strong investment return for the year and, being euro denominated, they also saw a currency uplift. It is currently Caledonia’s largest holding, albeit diversified through a portfolio of 14 businesses. Choice Care, the care homes operator, has almost completed a carefully managed expansion plan, adding about a third to its capacity. They are very aware of the danger of expanding too quickly and overstretching the capability to deliver top quality care, which remains, above all else, the number one priority. The pricing environment remains tough, with local authorities under great pressure to cut spending however, despite this, new bed spaces are being filled at acceptable margins. Sterling Industries is starting to see some recovery in its core markets of iron and steel and oil and gas, but had a difficult year with profits down sharply.
They reviewed well over 200 investment opportunities during the year, making two offers with one new investment and two follow-on investments. There is a significant amount of capital in the market chasing a small supply of high quality deals, which has inevitably led to increased valuations. They believe in buying the right business for the right price and try to use the competitive advantage over private equity funds brought by investing our own balance sheet (and thereby not being constrained by the period of time over which they can own a business), which management teams often find appealing.
Funds (GBP404m, 21% of net assets)
The Funds pool produced an excellent return for the year of 23.1%. Quoted market funds, focused on Asia and the US, represented 42% of pool assets at the year end. They deployed capital into Asia when sentiment was very much against the region two years ago and the 31% return this year has vindicated this decision. It remains one of the few areas of the world that is not fully valued. The money is looked after by five different managers across the two regions in a mixture of strategies.
The private equity portfolio continues to grow with GBP79m invested this year into a portfolio now valued at GBP235m. They received GBP53m of distributions from private equity funds following portfolio sales, although half of this came from further sales of JD.com by Capital Today China. They have total outstanding commitments of GBP293m, about 80% of which they expect to be drawn down over the next seven or eight years depending on the nature of the cycle. The programme is anchored by several fund of funds relationships, especially in Asia, which has a nascent private equity market. They believe this to be a sensible risk mitigant, as well as a good way to stay fully informed of, and close to, the market.
CLDN : Caledonia to pay £1 special dividend