Caledonia Regulatory News (CLDN)

Caledonia Investments plc

Final results for the year ended 31 March 2020

Financial highlights

Highlights

· ‑8.1% NAV total return for the year.

· Revenue profit after tax of £34.6m, unchanged from previous year. Capital losses of £207.5m, compared with profit of £163.6m last year.

· Strong balance sheet with £365m of available resources (£115m cash and £250m undrawn facilities).

· Valuation approach for private companies and funds included an assessment of the potential impact of the developing Covid‑19 pandemic.

· 3.0% increase in the dividend to 61.1p per share, 53 consecutive years of increase, to be paid in August.

Quoted Equity

· Resilient performance from Quoted Equity portfolios, ‑0.3% return over the year (FTSE All-Share was ‑18.5%), supported by our cautious approach to risk management and rebalancing of the Income portfolio.

Private Capital

· Good progress and robust trading from portfolio companies for the first 11 months of the year, but overall return of ‑18.0% for the 12 months.

· Majority of companies continue to trade normally with low degree of disruption from Covid-19. Buzz Bingo and Liberation Group leisure venues currently closed but good progress online from www.buzzbingo.com.

· Acquisition of minority holding in Stonehage Fleming, a market leading provider of family office services, completed at a cost of £90m.

Funds

· Strong underlying performance from private equity fund investments, but full year return of -2.8% (after £86m Covid-19 valuation adjustment).

Will Wyatt, Chief Executive, commented:

"Our diversified portfolio and our preference for investing in high quality businesses has so far provided some resilience to the impact of Covid‑19 on the company. The Quoted Equity portfolios were particularly effective at protecting shareholders' capital in volatile markets. Despite a decrease in net assets for the year, the majority of our investments are in a good position to withstand this challenging economic period though those in the consumer leisure sector face an uncertain future.

"It is likely that income for the current year will be lower than in 2020. However, our strong balance sheet and, in particular, our reserves of retained earnings, should give shareholders comfort that Caledonia is well placed to achieve its aims of growing net assets and dividends over the long term."

26 May 2020

Enquiries

Chairman's statement

Results

The NAVTR of ‑8.1% for the year was a resilient performance despite the appearance of the Covid‑19 virus in the last quarter. There was significant variance within the three pools through which Caledonia is managed. The Quoted Equity and Funds pools held up well on an absolute basis and relative to stock markets, proving effective at protecting shareholders' capital. Resulting from the Covid‑19 pandemic, the exposure to the consumer leisure sector in Private Capital's portfolio resulted in a significant mark down in valuations, reflecting the disruption in two particularly affected businesses. The remainder of the Private Capital portfolio traded well during the year. Management, at Caledonia and in the portfolio businesses, have responded to the extreme events caused by Covid‑19 to place our companies in the best possible position to recover when restrictions are lifted. Our strong balance sheet, with net cash of £115m and £250m of available facilities, gives us a secure platform to support our companies and take opportunities when they appear.

Covid-19

The pandemic has caused a number of unexpected outcomes. On the positive side Caledonia's IT team has managed the move to home working very effectively with minimal disruption to normal business. We are now planning in line with official guidance how we might safely return to office life, and intend to consult staff on these plans.

There is likely to be more volatility in markets as the full economic impact of the pandemic becomes apparent. It is also to be expected that some of our investee companies will have to adapt to the longer-term implications of customer concerns, social distancing and changing consumer demand. A degree of uncertainty is to be expected after a shock of this magnitude ripples through the global economy.

Income and dividend

Caledonia has a long and proud record of paying an increased dividend. In the year to 31 March, income totalled £53.4m which is a slight increase over the previous year. The portfolio is constructed to deliver sufficient income to cover both running costs and the annual dividend. This was achieved during the financial year. The board is proposing a final dividend of 44.5p per share, providing a full year dividend of 61.1p per share, an increase of 3.0% over last year.

As we look forward, it is likely that Caledonia will face a reduction in income from our investee companies suffering disruption from the Covid‑19 pandemic. If this occurs, any shortfall would require utilisation of Caledonia's £256m of retained earnings. This leaves the company well placed to meet a temporary shortage of income and pay dividends in the future should the board deem this appropriate.

Caledonia Fund

In response to the current crisis and the impact these events are having within some of our majority owned investee companies, a fund has been established to assist their employees suffering financial hardship. This is being funded by Caledonia, a contribution by our largest shareholder, The Cayzer Trust Company, and Caledonia's executive and non-executive directors.

The focus of the fund is on supporting employees at those companies where the business can no longer operate as normal and management have needed to utilise the Government backed furlough scheme. It should be noted this is primarily at Buzz Bingo and Liberation, where action has been taken to minimise costs wherever possible to preserve liquidity and reduce cash outflow. Measures include the use of the furlough scheme, reductions in senior management pay and the suspension of any cash payments to Caledonia.

Since the implementation of the Government's furlough scheme, no cash has been received by Caledonia from any of its majority owned investee companies that are accessing this scheme. In this regard, the proposed final dividend is not financed by any contribution made by these companies since the start of the Covid‑19 pandemic.

Outlook

Caledonia is well positioned to take a long-term view of its investments. As noted before, we expect the pandemic and its associated economic impact to provide both challenges and opportunities in the year ahead. At the time of writing the response by central banks has been extraordinary and the result of that action is being seen in a partial recovery in a number of markets. The issue is how sustainable this action is with government borrowing at record levels and the potential distortion to asset pricing. As the market goes through a process of normalisation it would not be surprising if we see more volatility in the months ahead.

Caledonia thinks long term and in this challenging environment is well positioned. It has available cash and banking facilities to ensure we have liquidity in place to take advantage of opportunities as they arise. As a board we are committed to the dividend and where income shortfalls do occur, we have retained earnings to maintain those payments in the future.

David Stewart, Chairman

Chief Executive's report

Aim

Caledonia's objective is to grow net assets and dividends over the long term, whilst managing risk to avoid permanent loss of capital.

Results for the year

Caledonia's portfolio is comprised of cash, listed equities, private equity funds and direct holdings in private businesses. This diversified portfolio offers shareholders some protection from over-exposure to particular sectors and geographies but, with an international pandemic of the scale of Covid‑19, has inevitably suffered from some loss of value. The NAVTR for the year was ‑8.1%. The revenue account of the income statement shows minimal impact from the pandemic, with profits for the year of £34.6m in line with the previous year. However, in keeping with the conservative culture of Caledonia, we have assessed the potential impact of Covid‑19 on our investments and have adjusted our valuations accordingly, resulting in a loss on the capital account of £207.5m, compared with a profit of £163.6m last year.

Our strong balance sheet, including £115m of cash and access to £250m in facilities, provides substantial liquidity with which to face an uncertain future. Our RBSI facilities of £137.5m were renewed in May for a further five-year term.

Impact of Covid-19 pandemic

The impact of the pandemic was first felt in the final quarter of our financial year. At a practical level, the restrictions on movement have led to the head office staff working from home. Whilst no replacement for normalised operations, we have been able to carry out our functions and controls to ensure the smooth running of the business. The board has been kept informed throughout this period of uncertainty and board meetings have continued via conferencing technology.

The performance of the portfolio was strong for eleven months of the year, with the pandemic only starting to have a notable effect in March, despite some exposure to Asia within the Funds pool. However, the precipitous stock market falls in March eroded the hitherto strong positive performance of our Quoted Equity holdings. On a relative basis, our listed portfolios produced results well ahead of comparative markets, thereby protecting shareholder's capital with a negative return of only 0.3% over the year.

The principal effect of the pandemic has been in our Private Capital valuations, where we have taken account of the potential Covid‑19 impact in our internally generated company valuations and in the valuation of our fund interests, typically based on managers' reports dated 31 December 2019. A company by company breakdown of the Private Capital pool can be seen in the pool performance section of this report.

Much of the portfolio has performed in a resilient fashion despite the immense disruption caused by Covid‑19. Until we have clarity on the lifting of restrictions and economies begin to normalise, it would be unwise to predict how quickly trading will recover in those companies most adversely affected.

Investment performance

Caledonia aims to achieve a NAVTR of 3-6% ahead of inflation over the short term, leading to results over the long term that exceed the FTSE All-Share Index. However, it is worth noting that our management and investment teams are incentivised on an absolute, not relative, basis. The table below shows our investment performance over one, three, five and ten years, with the adverse performance in the current year having a negative impact on short term metrics:

Long-term performance remains satisfactory though one and three-year numbers are weak compared with inflation. The element of protection afforded to shareholders' capital, compared on a relative basis to markets, is noteworthy.

Strategy and allocation

As indicated in the half-year results to 30 September 2019, we undertook a review of the Income pool, its aims and targets due to poor performance. As a result, the portfolio is now managed by the Quoted Equity team, in place of a separate Income team, with a yield target of 3.5% (previously a yield target of 4.5%). The annual performance total return target remains at 7%. The Quoted Equity team has been managing separate strategies for the Capital and Income portfolios since the end of September.

The investment portfolio consists of three pools of capital as shown in the tables below:

The allocation ranges expressed in the table above are a guide to ensure that the portfolio remains proportionately balanced.

The table below summarises the pool targets and strategic allocation:

Pool performance

Ten-year figures are not available, as measurement by pool commenced in 2011.

Caledonia Quoted Equity

Our two listed equity portfolios invest in well-managed businesses with good margins which are often leaders in their sectors, on a global basis. The performance of the Capital portfolio in exceptionally volatile markets was impressive, returning 1.3% for the year. The portfolio, which consists of high quality compounding businesses, proved resilient and largely avoided sectors hard hit by Covid‑19. The Income portfolio produced a return of ‑3.8%, including the impact of exiting historic legacy positions. Our cautious approach to risk management resulted in high cash balances and the rebalancing of the Income portfolio helped to protect capital and performance as markets fell in February and March 2020.

Caledonia Private Capital

Our diverse portfolio includes significant positions in six UK based businesses and one private European investment company, Cobepa, with which we also have a co-investment. These eight investments represent over 90% of the value of the Private Capital portfolio. Performance over the year, with a total return of ‑18.0%, was dominated by the impact of Covid‑19 on Buzz Bingo, Liberation Group and, to a lesser extent, Seven Investment Management ('7IM'). However, trading across most portfolio companies was robust prior to the appearance of the pandemic. Deep Sea Electronics ('DSE'), our largest investment, has made good progress in growing its business year on year and formulating strategic plans for the future. One new investment was completed in the year, a minority shareholding in Stonehage Fleming, the international family office services provider, for £89.5m.

DSE, the industry leading manufacturer of genset and ATS control modules, battery chargers and power supplies, has traded strongly over the past year delivering double digit returns. The changes being seen elsewhere from the Covid‑19 virus had only a marginal impact on DSE's operations, with its manufacturing site in the UK and representative offices in China and the US trading normally. We expect some reduction in demand in the current year. The valuation at 31 March 2020 was £122.6m, up 4.6% from March 2019.

Cobepa, the Belgian based investment company, owns a diverse portfolio of private global investments. We have used the net asset value at its year end of 31 December 2019 as the basis of valuation, applying a Covid‑19 adjustment to each business, having assessed, in conjunction with the management of Cobepa, the likely impact of the virus. Cobepa had significant reserves of liquidity as at 31 December 2019. The valuation of Cobehold, the holding company of Cobepa, at 31 March 2020 was £97.4m, down 7.1% from March 2019.

Stonehage Fleming, the international family office, continues to trade normally and reported record profits in the first year of our investment. The provision of management and advisory services to family offices, its main revenue stream, have been largely unaffected by Covid‑19 to date. A smaller proportion of the Stonehage Fleming's revenues are derived from assets under management ('AUM') related fees which will be impacted by the declines in public equity markets. The business remains profitable and has a strong balance sheet with plentiful liquidity. Caledonia owns a preferred position in the equity of Stonehage Fleming. The valuation at 31 March 2020 of £89.5m was in line with the cost of our 36.7% equity stake acquired in July 2019.

7IM, the retail investment manager, remains fully operational. Its revenue is directly linked to the value of its AUM, which have been negatively impacted by the declines in public equity markets. It is pleasing to note, however, that 7IM's defensively orientated funds have performed well on a relative basis. The business remains profitable and well-funded with significant amounts of available liquidity. The valuation at 31 March 2020 was £84.8m, down 21.3% from March 2019.

Liberation Group, a pub, restaurant and drinks business, with operations in the Channel Islands and South West England, has temporarily closed both its managed and tenanted pub estates in response to the coronavirus pandemic. The Jersey based brewery has also been closed. However, Butcombe brewery in the UK continues to brew on a much-reduced basis to fulfil increased online and trade demand. The wholesale distribution businesses in the Channel Islands continue to trade albeit at reduced levels. Costs have been reduced, including the furloughing of staff, to preserve liquidity and reduce the cash burn. Liberation owns a predominantly freehold estate with a net asset value of £124m. The business has net debt of £38.3m and cash on its balance sheet of £12.2m as at 31 March 2020. The valuation at 31 March 2020 was £50.6m, down 38.8% from March 2019.

Cooke Optics, a leading manufacturer of cinematography lenses, temporarily closed its facilities near Leicester, UK while it made arrangements for its workforce to operate safely within Covid‑19 social distancing restrictions. It reopened in April, gradually increasing output towards full production. Unsurprisingly, Cooke is witnessing a reduction in demand for new lenses whilst studios are closed, though demand from Asia has begun to return. The business has a strong order book and a good liquidity position with the £30m of senior debt on its balance sheet provided by Caledonia. The valuation at 31 March 2020 was £75.8m, down 18.1% from March 2019.

Buzz Bingo, the UK's biggest omni-channel bingo business, has temporarily closed all 118 retail venues in response to Government imposed social distancing measures. Buzz continues to operate and invest in its online business (www.buzzbingo.com) which is showing strong growth. The company employs over 3,500 people, rents the majority of its properties and had net debt of £104m, with cash on its balance sheet of £41m as at 31 March 2020. Costs have been minimised wherever possible to preserve liquidity and reduce the cash burn of the retail business including use of the Government's furlough scheme. Buzz has good relationships with its debt providers, which remain supportive of the business. The valuation at 31 March 2020 was £41.0m, down 54.5% from March 2019.

BioAgilytix, a US based bioanalytical testing solutions provider, had a strong year of growth, including completing the expansion of its facilities to provide further capacity. Caledonia is a co-investor in the business and follows the valuation methodology utilised by Cobepa, the lead investor. Valuation at 31 March 2020 was £22.6m, similar to that at 31 March 2019, despite a small reduction in underlying value which was broadly offset by favourable exchange rate movements.

The three remaining businesses in the portfolio have a combined carrying value of £27.6m. They have been affected to varying degrees by Covid-19, but are well-positioned for the future and to take advantage of potential opportunities as they arise.

Caledonia Funds

The Funds portfolio valuations were based on the managers' latest published capital account statements, which, due to timing, did not take account of the potential impact of Covid‑19. Therefore, managers' NAVs were adjusted by 16% overall, resulting in the Funds return reducing from 13.2% to -2.8%. The underlying performance of the portfolio was creditable, with some notable gains and distributions during the first nine months of the year. The investments are principally in private equity funds operating in the US and in Asia. We substantially exited our holdings in quoted market funds in 2019, a decision which avoided much of the volatility seen in US and Asian markets. The historic performance from this predominantly US dollar denominated portfolio has been strong, showing growth of 15.3% in the US and 11.0% in the more youthful Asian portfolio (prior to the application of the Covid‑19 adjustments) aided by the weakness of Sterling against the US dollar.

Geographic and foreign exchange exposure

Caledonia's diverse portfolio includes substantial exposure to non-Sterling assets, as set out in the table below. In September 2019, we instigated a currency overlay to reduce exposure of the portfolio to the US dollar and the euro, following a period of particular Sterling weakness leading up to and post the UK General Election. On 31 March, the currency and exposure positions were as follows:

Subsequent to the year end, and in light of events surrounding the Covid‑19 pandemic, the overlay position (which generated the hedged exposure position shown in the table) was phased out and our currency exposure reverted to that provided by our investments.

Outlook

The outlook for our financial year 20/21 very much depends on the successful return to normal for societies and economies around the world. It is developing into an annus horribilis but we hope that it will provide the platform from which we are able to return to growth.

The majority of our investments are in a good position to withstand this challenging economic period though those in the consumer leisure sector face an uncertain future. It is likely that income for the year will be lower than in 2020. However, our strong balance sheet and, in particular, our reserves of retained earnings, should give shareholders comfort that Caledonia is well placed to achieve its aims of growing net assets and dividends over the long term.

Will Wyatt, Chief Executive

Investments summary

Holdings over 1% of net assets at 31 March 2020 were as follows:

Risk management

Effective risk management is a key component of the company's business model and assists in ensuring that the different parts of the group operate within strategic risk parameters. The board has overall responsibility for setting and monitoring the company's risk appetite.

In March 2020, the Audit Committee conducted a review of the emerging risks arising from the Covid-19 pandemic and the mitigating actions taken by the business. The Committee considered actions to address financial risks arising from market volatility, liquidity and highly exposed Private Capital businesses. In addition, the operational risks associated with safety of staff, operational integrity and IT systems were all reviewed to ensure robust mitigation plans were in place.

Group statement of comprehensive incomefor the year ended 31 March 2020

The total column of the above statement represents the group's statement of comprehensive income, prepared in accordance with IFRSs as adopted by the European Union.

The revenue and capital columns are supplementary to the group's statement of comprehensive income and are prepared under guidance published by the Association of Investment Companies.

The loss for the year and total comprehensive income for the year is attributable to equity holders of the parent.

Statement of financial positionat 31 March 2020

The financial statements were approved by the board and authorised for issue on 26 May 2020 and were signed on its behalf by:

Statement of changes in equityfor the year ended 31 March 2020

Statement of cash flowsfor the year ended 31 March 2020

Notes to the final results announcement

1. General information

Caledonia Investments plc is an investment trust company domiciled in the United Kingdom and incorporated in England in 1928, under number 235481. The address of its registered office is Cayzer House, 30 Buckingham Gate, London SW1E 6NN. The ordinary shares of the company are premium listed on the London Stock Exchange.

The financial information included in this announcement has been prepared using accounting policies consistent with International Financial Reporting Standards ('IFRSs') as adopted by the European Union.

Under the UK Corporate Governance Code and applicable regulations, the directors are required to satisfy themselves that it is reasonable to presume that the company is a going concern. After reviewing the company's performance projections for a period of at least 12 months, the directors are satisfied that, in taking account of reasonably possible downsides including the potential impact of Covid‑19, the company has adequate access to resources to enable it to meet its obligations and to continue in operational existence for the foreseeable future. The directors have considered the impact of the emergence and spread of Covid‑19 and potential implications on the future of the company. Whilst there are significant wider market uncertainties which may impact portfolio company investments (Private Capital) and the fund investments (Funds pool), the company does not believe this will significantly impact the liquidity of the company over the next 12 months. Accordingly, the directors have adopted the going concern basis in preparing these financial statements.

In the current year, the group has adopted IFRS 16 Leases. Adoption of this standard did not impact the financial position of the group.

2. Dividends

Amounts recognised as distributions to owners of the company in the year were as follows:

Amounts proposed after the year end and not recognised in the financial statements were as follows:

The proposed final dividend for the year ended 31 March 2020 was not included as a liability in these financial statements. This dividend, if approved by shareholders at the annual general meeting to be held on 29 July 2020, will be payable on 6 August 2020 to holders of shares on the register on 26 June 2020. The ex-dividend date will be 25 June 2020.

The deadline for elections under the dividend reinvestment plan offered by Link Asset Services will be the close of business on 16 July 2020.

For the purposes of section 1158 of the Corporation Tax Act 2010 and associated regulations, the dividends payable for the year ended 31 March 2020 are the interim and final dividends for that year, amounting to £33.5m (2019 - £32.5m).

3. Earnings per share

Basic and diluted earnings per share

The calculation of basic earnings per share of the group was based on the profit/(loss) attributable to shareholders and the weighted average number of shares outstanding during the year. The calculation of diluted earnings per share included an adjustment for the effects of dilutive potential shares.

The profit/(loss) attributable to shareholders (basic and diluted) was as follows:

The weighted average number of shares was as follows:

4. Operating segments

The following is an analysis of the profit/(loss) before tax for the year and assets analysed by primary operating segments:

5. Share-based payments

In the year to 31 March 2020, participating employees in the performance share scheme were awarded options over 239,138 shares at nil-cost (2019 - 261,816 shares).

Also in the year to 31 March 2020, participating employees received deferred awards over 44,930 shares (2019 - 493 shares).

The IFRS 2 credit included in profit or loss for the year was £2.4m (2019 - £6.6m expense).

6. Net asset value

The group's undiluted net asset value is based on the net assets of the group at the year end and on the number of ordinary shares in issue at the year end less ordinary shares held by the Caledonia Investments plc Employee Share Trust. The group's diluted net asset value assumes the calling of performance share and deferred bonus awards.

Net asset value total return is calculated in accordance with AIC guidance, as the change in NAV from the start of the period, assuming that dividends paid to shareholders are reinvested at NAV at the time the shares are quoted ex-dividend.

7. Capital commitments

At the reporting date, the group and company had entered into unconditional commitments to limited partnerships, committed loan facility agreements and a conditional loan and purchase agreement, as follows:

Conditionally contracted commitments at 31 March 2019 included £142.6m in respect of the acquisition of a minority holding in Stonehage Fleming, then subject to regulatory approval.

8. Performance measures

Caledonia uses a number of performance measures to aid the understanding of its results. The performance measures are standard within the investment trust industry and Caledonia's use of such measures enhances comparability. Principal performance measures are as follows:

Net assets

Net assets provides a measure of the value of the company to shareholders and is taken from the IFRS group net assets.

Net asset value ('NAV')

NAV is a measure of the value of the company, being its assets - principally investments made in other companies and cash held - minus any liabilities expressed as pence per share. NAV is calculated by dividing net assets by the number of shares in issue, adjusted for shares held by the Employee Share Trust and for dilution by the exercise of outstanding share awards. NAV takes account of dividends payable on the ex-dividend date.

NAV total return ('NAVTR')

NAVTR is a measure of how the net asset value per share has performed over a period, considering both capital returns and dividends paid to shareholders. NAVTR is calculated as the increase in NAV between the beginning and end of the period, plus the accretion from assumed dividend reinvestment during the period. NAVTR assumes that dividends are reinvested at the NAV on the ex-dividend date.

Annual dividends

Annual dividends are dividends declared as part of the company's recurring dividend cycle and are typically paid out of earnings in a financial year. Annual dividend growth is the compound annual dividend growth rate over the period.

Total shareholder return ('TSR')

TSR measures the return to shareholders through the movement in the share price and dividends paid during the measurement period.

9. Financial information

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2020 or 2019 but is derived from those accounts. Statutory accounts for 31 March 2019 have been delivered to the Registrar of Companies, and those for 31 March 2020 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 March 2020 will be delivered to shareholders on 25 June 2020 and made available for download from the company's website on that date. Also, a copy will be delivered to the Registrar of Companies in accordance with section 441 of the Act, following approval by shareholders.

The statutory accounts for the year ended 31 March 2020 include a 'Directors' statement of responsibility' as follows:

We confirm that, to the best of our knowledge:

Signed on behalf of the board by:

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END

Copies of this statement are available at the company's registered office, Cayzer House, 30 Buckingham Gate, London SW1E 6NN, United Kingdom, or from its website at www.caledonia.com.