Comment: New chief aims to put fizz back into Caledonia

By BILL JAMIESON
Published on 25/06/2012 00:00

HERE, beyond much doubt, would be an automatic portfolio choice. It is one of Britain’s biggest investment trusts. It is one of the most diversified, both by asset type and geography. It provides ideal access to some of the most promising unquoted investments.

On a ten-year view it has sported an enviable growth record. It is committed to a significant and sustained increase in its dividend.

And here is the clincher, if none of the above appeals: the shares are standing at a stonking discount to the value of the trust’s underlying assets of 26 per cent.

Yet the discount is testimony to an uncomfortable and worrying truth. Caledonia Investments, with its £1.9 billion of assets and commitment to long-term investment, is one of the most unloved shares in the investment trust sector. If you think Alliance Trust has a valuation problem, dwell on this. Can a break-up boarding party be far behind?

I have been a fan of Caledonia over many years and a devotee of chairman Peter Buckley, whose sudden death in 2008 inflicted a cruel loss. Backed by the Cayzer family and with a reassuring blend of old money and a value-investment approach, Caledonia was the trust of choice for those seeking exposure to global blue-chip shares and quality unquoted investments.

Many of its unquoted investments have been stunningly successful. The residual cost of 10.2 per cent holding in Belgian investment bank Cobehold is £35.2 million and the current valuation £85m. Engineering group Sterling Industries was acquired in 1989 with a residual cost of £5.3m. Today it is valued at £29m. A 22.5 per cent stake in Satellite Information Services has risen from a residual cost of £16.7m to £29.8m.

Nor have the investments in some of its quoted companies been any less impressive. The holding in investment bank Close Brothers has a residual cost of £43.1m; the current value £154m. The holding in helicopter services group Bristow cost £36.8m. Today’s value is £72.9m. Polar Capital, bought for £700,000, is now valued at £21.4m. It first took an investment in soft drinks concern AG Barr in 1977. The residual cost of the holding was £1.2m; today its 8.8 per cent stake is valued at £40.2m.

But in recent years the bloom has faded. Over the past 12 months, shares in Caledonia have fallen more than 15 per cent – more than double the fall in its benchmark index. Over five years it is down 24 per cent while the benchmark posted a small gain. Today its shares are standing at 1,419p, having been as high as 1,780p in the past 12 months.

What ails Caledonia? Market uncertainty over the valuation of unquoted investments in today’s volatile “risk-on, risk-off” conditions is certainly one factor. It is compounded by the fact that Caledonia takes big long-term bets on a few companies, which can make for an uneven performance compared with more diversified portfolios. The biggest holdings comprise Close Brothers, accounting for 13 per cent of total assets; Cobehold (7.2 per cent) and Bristow Group (6.2 per cent). Close Brothers suffered a 7 per cent fall in its share price over the year, while quoted Avanti Communications – where Caledonia holds almost 14 per cent of the equity – slumped 42 per cent. Its 10.3 per cent holding in Melrose Resources plunged by 51 per cent.

The portfolio overall also has a 15 per cent exposure to deeply troubled Europe. And so, prior to last year, the Caledonia dividend was nothing to write home about.

However, big changes are already under way by new chief executive Will Wyatt to lift performance and narrow the discount. Non-core or “sub-scale” investments have been sold or reduced and the income and growth pool has been enlarged to boost revenue. The final dividend is being lifted 20 per cent to 31.2p. Caledonia has also stepped up the purchase of its own shares.

Caledonia remains one of the most interesting and promising investments in the sector, with good prospects for those prepared to take a long-term view. At today’s price, on a discount of 26 per cent and a yield of 3.1 per cent, Caledonia looks an opportunistic buy. Underpinning the shares is the possibility that, with any further widening of that discount, Caledonia may attract break-up proposals from a predator.