Caledonia Investments (CLDN)

Price: £35.18

Market cap: £1.92 billion

Amid all the talk of the UK market being full of ‘hidden gems’, we think Caledonia Investments (CLDN) could be one of the best examples of ‘hidden value’ in the mid-cap FTSE 250 index.

The global multi-asset investment company tends not to get much air-time, but Shares caught up with chief executive Mat Masters and finance director Rob Memmott after the publication of the full-year results.

Caledonia was originally a shipping company, founded by Sir Charles Cayzer in 1878 and today, six generations later, the company is still 48% owned by the Cayzers, making it less an investment trust and more of a ‘family office’ whose job is to create and protect wealth for generations to come.

For that reason, the firm doesn’t take big risks, rather it buys stakes in businesses it understands, both public and private, and takes a long-term view.

Nothing demonstrates that long-term view quite like the fact Caledonia has raised its payout for 57 years in a row, making it not just a Dividend Aristocrat but dividend royalty.

For the year to March, NAV (net asset value) total return was up 7.4% to £3 billion or £50.68 per share, putting the shares on a 30% discount at the current price.

All three investment pools made a positive contribution, with public equity up 12%, well ahead of its 8.6% annual 10-year average, private equity up 12.3% against its 10-year average of 13.9% and the funds side up 2.2%, well below its 17.3% 10-year average due to a decidedly ‘off’ year for Asian private markets.

Within the £950 million public equity allocation, the ‘capital portfolio’ which is invested for gains returned 14% thanks to holdings in Fastenal (FAST:NASDAQ), Hill & Smith (HILS) and Microsoft (MSFT:NASDAQ) among others, while the ‘income portfolio’ returned 7% driven by DS Smith (SMDS), Fastenal and RELX (REL).

The £820 million private capital allocation, which is UK-centric, enjoyed £90 million of net valuation gains thanks to realisations and positive operating performances from its investee companies.

Assuming Asian private markets – which in any case are a small part of the funds business – recover steadily, and the quoted and unquoted portfolios continue to grow at or close to their decade-long averages, we would expect the 30% discount to NAV to narrow over time.

We would also note that given over a third of NAV is made up of liquid stocks and cash, the implied discount on the unquoted assets is more than 50% so the potential for upward reversion is significant.

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