Peel Hunt: Deep Sea gain adds to ‘solid’ Caledonia’s appeal

This month's profitable sale of Deep Sea Electronics offers shareholders in Caledonia Investments some reassurance after an awkward year for the defensive, global multi-asset fund, says a Peel Hunt analyst.

Covid-19 may have forced write-downs at Caledonia Investments (CLDN ) but the sale of Deep Sea Electronics at a 25% premium has provided a buffer in the event of any more turbulence, says broker Peel Hunt.

The £1.7bn global multi-asset trust, which invests in quoted stocks, unlisted companies, and funds, lagged its benchmark in the year to end of March, according to results published last month. The net asset value (NAV) total return of 26% fell shy of the 27% delivered by the FTSE All Share as the private capital portion of the fund took a hit from the write down of its holding in Buzz Bing.

Its stake was valued at zero at the end of February and Caledonia subsequently offloaded its majority shareholding to Intermediate Capital for a ‘nominal amount’, having acquired the stake in the Gala Bingo brand for £240m in 2015.

Peel Hunt analyst Ollie Nott, who has a ‘neutral’ recommendation on the trust, said despite a tough year the full-year numbers were ‘solid’ with other private equity investments doing well and public equities performing well, particularly in North America.

In a note this week he said while the 23% share price discount to NAV was still wide it was in line with the 12-month average.

Nott also ‘took comfort’ from the sale last week of unlisted Deep Sea Electronics, which provides back-up power control systems, to New York-listed energy technology group Generac.

Caledonia received proceeds of £242.2m in cash for its 84.2% stake in the group, and 25% above its most recent valuation. By the time fees are paid, Nott expects the total proceeds to be around £193m. The company first invested in October 2018.

Nott said the proceeds from the sale ‘should provide an additional buffer if Caledonia was required to support any further calls for capital from portfolio companies’.

This should reassure investors in the prospects for the unquoted portion of the portfolio, on which Nott said the fund had acted decisively during the pandemic.

‘Following the disruption last year, the team was quick to apply conservative values to its unquoted holdings,’ he said.

‘Since then, fund NAVs have been restored to managers’ estimates and Caledonia’s internal adjustments removed, boosting NAV returns…[the] divestment of Deep Sea Electronics should restore some confidence following the disappointing holding in Buzz Bingo.’

The trust has a large proportion invested in private assets, around 66% of NAV, and there may be scope for some re-rating of the assets as it is still holding its stake in Liberation Group at tangible asset value.

Liberation, which makes up 6% of the NAV, is a Channel Islands-based brewer and pub operator that Caledonia bought in 2016 for £118m.

Although Caledonia lagged the FTSE All-Share over the financial year, over three, five and 10 years its 8-9% annualised returns have achieved its shorter term target of growing assets by 3-6% ahead of inflation. Over 10 years this means it has performed much better than the benchmark, delivering a 138.5% NAV return versus the All-Share’s 92% total return.

In addition, despite the fall in investment income during the pandemic, Caledonia used some of its revenue reserves to increase its dividend by 2.9% to 62.9p per share, the 54th consecutive year the ‘dividend hero’ has done so. The shares yield 2%. 


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