Interim Results

Caledonia Investments PLC 21 November 2002 21 November 2002 Interim Results, Strategy Review Results and Proposed Conversion to Investment Trust Status Caledonia today announces: • Interim results for the six months ended 30 September 2002 • Strategy review results • Proposal to convert to investment trust status The key highlights are: 1. Results for the six months to 30 September 2002 • Strong outperformance of total shareholder return against FTSE All-Share Total Return • 70% over ten years (178% vs 108%) • 35% over five years (18% vs -17%) • 10% outperformance of adjusted NAV per share against FTSE All-Share over six months 1 • 2.6% increase in interim dividend to 8.0 pence per share • Strong cash position 6 mths 6 mths Year 30 Sep 2002 30 Sep 2001 31 Mar 2002 £m £m £m Total operating profit 17.6 15.2 26.1 Profit before taxation 14.7 8.9 8.2 Shareholders' funds 664.7 732.0 737.9 p p p Basic earnings per ordinary share 14.9 8.1 3.8 Adjusted basic earnings per ordinary share 13.2 9.9 18.6 Dividends per ordinary share 8.0 7.8 25.0 Net asset value per ordinary share 915 985 1010 Adjusted net asset value per ordinary share 1 941 1014 1172 1. At 30 September 2002, adjusted to include subsidiaries and associates at valuation. Comparative figures adjusted to include listed associates at valuation. Applying this latter basis of adjustment at 30 September would have resulted in an adjusted NAV per share of 950 pence. All figures are stated before contingent tax on investment revaluation. 2. Strategy review results • Deliver total shareholder return outperformance against the FTSE All-Share Total Return index over five and ten years • Maintain progressive dividend policy • Focus on portfolio of 30 to 40 principal investments - both quoted and unquoted • Be a supportive, proactive long term investor with influential stakes • New investment size of, typically, £10m - £25m • Use of moderate gearing where appropriate • Tight cost control 3. Proposal to convert to investment trust status • No liability for tax on chargeable gains • Enhanced appeal to retail investors • Potential for reduction in share price discount • New valuation methodology based on BVCA guidelines • Conversion to be effective from 1 April 2003 (subject to all necessary approvals) Commenting on the announcement, Peter Buckley, Chairman of Caledonia, said: 'Caledonia has yet again produced a robust set of results with significant outperformance over our benchmarks and an increased interim dividend. We have a strong balance sheet and are well placed to take advantage of the opportunities which we expect to emerge from the continuing difficulties in world markets. We have kept the structure of Caledonia under consideration over the years and following a review of our strategy by Tim Ingram, our new chief executive, we have concluded that, given the substantially reduced costs of conversion to investment trust status following the significant fall in equity markets, the benefits of doing so now will outweigh the costs. Becoming an investment trust should make Caledonia more attractive to investors, which will be to the benefit of all existing and prospective shareholders.' Enquiries: Caledonia Investments plc Tel: 020 7457 2020 (today) Tim Ingram, Chief Executive Tel: 020 7802 8080 (thereafter) College Hill Tel: 020 7457 2020 Alex Sandberg Tony Friend Chairman's Statement Results As is well known, investment markets have been very difficult over the six month period to 30 September 2002 and whilst the fall in the value of shareholder funds is extremely unwelcome, we are pleased that Caledonia's long term strategy has continued to deliver considerable outperformance. Our ten year benchmark of total shareholder return ('TSR'), which is the share price movements with dividends reinvested, to 30 September 2002 has amounted to 178%, which compares with the FTSE All-Share Total Return of 108%. We are now introducing an additional performance benchmark of five year TSR, which again shows substantial outperformance of 35% to 30 September 2002. Over the five years, our TSR has shown an 18% increase against a fall of 17% in the FTSE All-Share Total Return. These outperformances against longer term benchmarks measure periods more attuned to Caledonia's investment approach and strategy, which have recently been reviewed by the Board and are referred to below. The six months to 30 September 2002 has witnessed a fall of 30% in the FTSE All-Share index which is one of the most significant declines since 1974. Against this, the fall of 20% in Caledonia's adjusted net asset value per share to 941 pence, before contingent tax on investment revaluation, represents a marked outperformance of 10% although, as I have said, we acknowledge the fall to be very unwelcome. However, the decline in our share price over the period represented a lower outperformance of 2% against the FTSE All-Share index, essentially due to a widening of the share price discount to adjusted net asset value. Important proposals to help address this discount are referred to below. Dividend A key feature of Caledonia's strategy has been the maintenance of a progressive dividend policy and the attractions of this become increasingly important to shareholders as fewer equity investments offer such a prospect. Caledonia has a 35 year record of unbroken annual dividend increases and, for the half year under review, the combination of a strong cash position and a robust balance sheet has enabled the directors to declare an increase of 2.6% in the interim dividend to 8.0 pence per share at a cost of £5.7m. The Board At the time of the last annual report, I was very pleased to announce the appointment, in early June 2002, of Tim Ingram as chief executive following the decision to separate the roles of chairman and chief executive. As I have previously stated, Joe Burnett-Stuart intends to retire at the end of this calendar year following twelve years of distinguished service as a non-executive director. Caledonia's nomination committee is presently undertaking a search for a successor independent non-executive director and I expect to announce an appointment in due course. With the previously announced appointments of Charles Allen-Jones in November 2001 and Mark Davies in May 2002, Caledonia continues to benefit from a Board that contributes an immense resource of experience and expertise to carry the company forward. Strategy and Proposed Conversion to Investment Trust Status Since joining the company, Tim Ingram has led a review of the group's strategy and details of this are set out in the chief executive's report. Within this process we have again examined the efficiency of the group's structure with particular regard to taxation. One possible structure, which we have kept under consideration over the years, is that of approved investment trust status, whereby there is no corporation tax liability on chargeable gains arising from investment disposals. To date, the restructuring of Caledonia to qualify for this has been rejected on the grounds of cost. However, with the downward movement in the equity markets, the estimated cost of conversion has fallen significantly and is now considered by the Board to be acceptable, and it is intended to establish approved investment trust status as from 1 April 2003. This will require certain approvals and we anticipate sending a circular to shareholders during January 2003, with the necessary meetings to follow. We believe that over time we shall, as an investment trust, build greater value for shareholders and this should, along with other factors flowing from our review of strategy, contribute towards a lower discount of share price to net assets. Outlook Notwithstanding the continuing turmoil in world markets, Caledonia's measured approach has enabled the company to continue to outperform. The company has always been prepared to adapt to new circumstances in the context of a medium to longer term approach. This is evident in the decision to seek approved investment trust status at a time when it is estimated that the cost of conversion is significantly lower following recent stock market movements. It is too early to predict performance for the full year, particularly against the background of volatile markets and the economic and world events which may affect all of us. Nevertheless, Caledonia's approach has enabled it to maintain a strong balance sheet and to declare an increased interim dividend and we believe that we are well placed to take advantage of the opportunities that we expect to emerge as a result of these difficult times. Chief Executive's Report Review of Operations Introduction As explained in the chairman's statement, at 30 September 2002 we have again significantly outperformed our total shareholder return benchmark on both five and ten year measurements, with outperformance of 35% and 70% respectively for these periods. It should be further noted that, if we had been included in the Association of Investment Trust Companies ('AITC') Global Growth sector, which we believe represents a good comparator for Caledonia, this would put us in the top quartile of performers for each of these periods on a total shareholder return basis. Although our adjusted earnings per share increased by 33% to 13.2 pence for the six months under review, as stated in the past, we do not believe this measure to be a particularly relevant indication of either the performance or inherent value of an investment company like Caledonia. Rather, the adjusted net assets per share gives a much better indication while, over the longer term, total shareholder return measures the value creation for shareholders. In order to give a clearer understanding of the valuation of our investment portfolio, we have adopted a valuation methodology based on the British Venture Capital Association ('BVCA') guidelines, which is discussed further in the financial review. The aggregate value of our portfolio at 30 September 2002, using this basis, is not materially different from the figure derived from our previous methodology. We believe that this should make our accounts more comparable with other investment companies and help promote a better understanding of our value. In the six months to 30 September 2002, our adjusted net asset value per share, before contingent tax on investment revaluation, reduced by 20% to 941 pence, which nevertheless represents significant outperformance against the FTSE All-Share index, which decreased by 30% over the same period. We believe that, in the exceptionally difficult conditions of the period under review, this demonstrates the strength of our investments. The performance of Caledonia's largest investments is commented on, as in the past, by considering each sector in turn. Our percentage holding and valuation at 30 September 2002 is shown for each investment. Financial 30% of our portfolio is invested in this sector, reflecting both our understanding and expertise in this area, and its importance to the economy. The six months under review have seen a continuation of difficult times for many businesses, with further falls in most world stock markets. However, we are reassured by the quality of our holdings in this sector. Close Brothers (18% holding: £124m) saw a decline in its adjusted earnings per share of 18% for the year to 31 July 2002 with falls in the contribution from its market related activities of asset management, market making and corporate finance. However, profits from banking, which include asset finance, showed growth of 35% to record levels. Rod Kent who has presided over the remarkable progress of this business for the past twenty five years, retired as managing director in October. He will remain on the board and leaves behind a sound management team with a distinctive culture and we wish to pay a warm tribute to his outstanding record. ICAP (4% holding: £32m), the world's leading interdealer broker, has bucked the trend in the financial services sector with record results to 31 March 2002 and continues to pursue an active acquisition policy to strengthen and widen the scope of its business. Activity in its markets has remained buoyant in recent months, which is reflected in its share price being at or near to an all time high. Rathbones (12% holding: £26m) reported a fall of 4.4% in adjusted earnings per share for the six months to 30 June 2002 against the comparative period, which is a robust performance in these difficult markets. Encouragingly, funds under management have recorded an increase of 1.7% to £5.9bn, which must be counted as a significant achievement. During the period, we added slightly to our holding in Rathbones at a cost of £1.4m. ISIS Asset Management (6% holding: £17m) ('ISIS') (formerly Friends Ivory & Sime) announced lower earnings per share for its half year to 30 June 2002 against the background of weak global stock markets. However, the interim dividend was maintained at last year's level. The previously announced acquisition of the Royal & SunAlliance investment management business was completed on 1 July 2002. This transformational transaction more than doubled funds under management and placed ISIS in the top ten list of active fund managers in the UK, where it is now a major industry participant in areas such as fixed interest, active equity, property management, socially responsible investment and insurance funds. Leisure and Media This sector comprises 19% of our portfolio and is a further area where we bring particular management understanding and knowledge. Our holdings mainly comprise the investments described below. Kerzner International (21% holding: £85m) ('KI') changed its name from Sun International Hotels in June 2002 as part of an agreement with its significant South African shareholder, Kersaf, to reduce substantially its shareholding in KI. Trading for the six months to 30 September 2002 improved over the comparable period in the previous year, which included the immediate aftermath of 11 September 2001. Activity in the period included the completion of a 1200 room hotel at the Mohegan Sun Casino in Connecticut, in which KI has a 2.5% revenue participation, and the acquisition of a 50% interest in the luxury La Palmilla resort and golf course in the Baja Peninsula in Mexico, which will be the subject of further development. In October 2002, Kersaf reached a settlement with KI to buy out an annual contribution payable by it to KI for a lump sum payment of US$32m. KI continues to review a number of interesting proposals for the further development of its business. The Sloane Club (100% holding: £29m) maintained satisfactory occupancy levels against a background of economic and political uncertainty and the valuable property occupied by the Club underpins the quality of the business. Radio Investments (39% holding: £12m) continued to grow its revenues strongly in spite of a weak industry background during its year ended 30 September 2002. Its portfolio concentration on small local radio stations has enabled it to record strong revenue growth over each of the past two years and it anticipates that its predominantly local radio advertising revenue will continue to grow in the forthcoming year. Property and General 17% of our portfolio is invested in this sector. Property is a long established area of activity for Caledonia and over the years we have identified and supported a number of small property management teams. We also hold a portfolio of general investments. Quintain Estates (7% holding: £21m) demonstrated a robust share price performance, benefiting from its strategic land holdings on the Greenwich Peninsula and adjacent to the Wembley Stadium development. Buckingham Gate (100% holding: £20m) owns our head office property, which we moved into in September 2001. We have now rented out most of the space not occupied by ourselves. Edinmore (100% holding: £11m), which seeks out land and property opportunities in the UK, has enjoyed a higher level of activity generating increased profits. Its holding of properties, which have good prospects for the future, has increased by £7m over the period. Paladin Resources (6% holding: £11m), the quoted oil and gas exploration and production company has further increased its reserves through both acquisition and exploration. We increased our holding in Paladin during the period by 1% at a cost of £1.7m. Industrial and Services Our industrial subsidiaries are included in this sector, which in total represents 16% of our portfolio. Offshore Logistics/Bristow (6% holding: £30m) reported earnings of US$0.90 per diluted share for the six months to 30 September 2002 compared with the result for the comparative period of US$1.02. Notwithstanding uncertainties in future oil field activity caused, in particular, by world political events, the company is seeking to reinforce cost efficiencies to consolidate its position as the pre-eminent provider of offshore helicopter services to the oil and gas industry world wide. In addition, the company has seen some expansion of its services to the UK Ministry of Defence in both training and offshore support roles. Amber (100% holding: £22m) has enjoyed a strong performance overall from the company's silicone division offset by a reduction in levels of activity in industrial consumables. Development of new business, combined with cost control, remains a priority. Sterling Industries (100% holding: £18m) continued to experience difficult trading conditions, though the results of a recent restructuring are beginning to show through. The first half year's result compares favourably with a year ago despite certain exceptional items relating to one-off closure and redundancy costs. Wallem (74% holding: £13m) recorded lower earnings during its year ended 30 September 2002. Conditions in the shipmanagement sector remained competitive and weaker transpacific rates impacted agency revenues during the year. Investment Funds This 14% of the portfolio covers sector areas and activities in which we wish to invest, but where we believe best value can be gained through using third party asset managers. British Empire Securities (20% holding: £51m) has recently announced another year of strong relative performance, with a fall in NAV of 7% for the year to 30 September 2002, compared with a fall of 26% in its benchmark. Over the past three financial years, NAV per share has risen 9% against a fall in its benchmark index of 37%. British Empire was the top performing trust in the AITC Global Growth sector over five years to 30 September 2002. Aberforth Partners' fund (26% participation: £17m) has outperformed comparator indices since its launch in April 2001. It continues to focus on value situations in the listed smaller companies sector. At 30 September 2002, £5m of Caledonia's £25m commitment to the fund remained to be called. Technology This sector represents only 3% of our portfolio. As this is not an area of particular management expertise in Caledonia, future investment is more likely to be through third party asset managers. The technology sector has continued to be weak and we are not anticipating much significant improvement in the near term. Chief Executive's Report Strategy and Investment Trust Conversion Since joining Caledonia I have led a review of Caledonia's strategy and structure. The conclusion of this process has not resulted in any major change in the way in which the company will conduct its business, but rather a refinement and clarification of its strategy. However, the review concluded that Caledonia should convert to an investment trust. The key elements of the new strategy and proposed investment trust conversion are summarised below. Overall Aim Caledonia's financial aim is to achieve consistently over the longer term, using five and ten year measurements, a total shareholder return in excess of the FTSE All-Share Total Return, through a combination of capital growth and the maintenance of a progressive dividend. Our investment strategy is to focus on taking, and then managing, a number of significant stakes in companies and situations where we believe there to be good opportunities for building value. It is our policy that disposals of investments are made at the appropriate time and in a manner consistent with Caledonia's reputation as a supportive long term investor. Through holding a diversified portfolio we aim to maintain a medium overall risk position. Caledonia intends to remain alert to the changing opportunities in the market place and the Board will, where appropriate, amend its investment strategy in order to build value for shareholders. New Investments Our guideline for the size of each new investment is £10m to £25m with a maximum for any new investment of £50m. Normally, we aim to have an influential minority stake but will, on occasion, be prepared to take a controlling interest when it is believed that this will maximise shareholder value. New investments may be quoted or unquoted but with the policy that at least 50% of Caledonia's total portfolio should be in quoted securities or other liquid assets. When considering an investment opportunity, particular care is spent in appraising the capabilities and commitment of the management team in the investee company. The anticipated total return from the investment, our strategy in relation to it, and the overall risks, are carefully analysed as part of the investment process. Caledonia is focused on a selected range of sectors. In those where we have good in-house knowledge and can add value to management of the investee company, we will normally invest direct. However, where particular expertise is required, which we do not have in-house, we will normally invest through third party managed funds. Again, a core skill is the ability to assess the capabilities and commitment of the asset management team and, in these cases, we will often seek to obtain a significant stake in the management company itself, thereby potentially enhancing the returns. As mentioned above, Caledonia's policy also provides for investment in entities with significant overseas activities. In order to ensure that we can effectively maintain active involvement with our investments, Caledonia will have a preference for new direct investments to be in entities whose senior management are based in the United Kingdom. Whilst the source of funding for new investments generally comes from Caledonia's own resources, we may, at times, seek to enhance shareholder returns by taking on moderate levels of gearing. Management of Investments Caledonia seeks to work closely and constructively with the management of companies that it has backed and to make available the considerable experience of its own investment team, often through board representation. Our experience in a range of sectors enables us to help management address the business issues. Where appropriate, we assist investee companies through access to our extensive network of business contacts and by working with management to pursue growth opportunities. To implement effectively our investment strategy, we plan to focus on a portfolio of around 30 to 40 principal investments to ensure that we can be actively involved. Our management regularly reviews the progress and strategy for each investment, including the returns and the timing of eventual disposal and, in addition, all major investments are subject to a formal annual review by the Board. Disposals are made when we believe that the funds released can provide better returns through being invested elsewhere. In managing the timing and manner of disposals, particular care is taken to protect our reputation as a supportive long term investor. Cost Control Tight control is exercised over costs, notwithstanding our active and participative management style. Cost containment is significantly aided by our policy of managing the large majority of our assets through our in-house management team thereby reducing third party fees and also ensuring that performance gains on these investments accrue to Caledonia's own shareholders. Investment Trust Conversion Providing the necessary approvals are obtained, we intend to convert to investment trust status with effect from 1 April 2003. Further details on this will be contained in a circular to shareholders which we intend to send out in January 2003. Rationale for Change Despite Caledonia's long record of strong outperformance and unbroken annual dividend increases, its shares have often traded at a substantial discount to its adjusted net asset value. At 30 September 2002, this discount, after contingent tax on investment revaluation, was 33%. This compares to a weighted average discount as at 30 September 2002 for its investment trust peer group within the AITC Global Growth sector of 12%. We believe that this substantial discount is due to a number of factors, including: • Caledonia's current liability for corporation tax on chargeable gains, which is not the case with investment trusts; • Caledonia's current listing in the Speciality and Other Finance sector, where it has no real comparators; • an insufficient understanding by investors of Caledonia's investment strategy and valuation policy; • an absence of regular information on Caledonia's net asset value; and • the limited liquidity in Caledonia stock. Conversion to investment trust status should directly address the first two points. We are also planning to undertake a number of other measures consistent with the conversion to investment trust status, which should improve the understanding of Caledonia and highlight its strengths. Benefits of change We believe that there will be substantial benefits for our shareholders as: • investment trust status will bring a more efficient tax structure; • investment trust sector valuation yardsticks should enable a better understanding of net asset values; • monthly publication of net asset values (after investment trust conversion) will provide more regular information to shareholders; and • these changes should enhance Caledonia's appeal to retail investors. It is hoped that the advantages of conversion will, over time, have a beneficial effect on the discount of the company's share price to its net asset value. Additional Information We have been carefully examining the various implications of conversion and have obtained extensive professional advice on this. Areas we have addressed include: Conversion cost As part of the process of converting to investment trust status, it will be necessary for Caledonia to undertake certain group reorganisations, some of which will give rise to tax charges at or around the time of conversion. The precise amount will be dependent on agreement with the Inland Revenue on various valuation issues. However, we have estimated that if conversion had taken place at 30 September 2002, the overall costs, including tax, would have been approximately £20m. At this level of overall cost, we believe that the benefits of conversion will significantly exceed the costs. Distributable reserves A key financial aim of Caledonia is to maintain a progressive annual dividend, and we have a 35 year unbroken record in this respect. As investment trusts are not permitted to distribute surpluses on investment realisations, it is of particular importance that we have a high level of distributable reserves at conversion to underpin this policy for the foreseeable future. Providing there is no material change to our expected level of distributable reserves prior to conversion, and subject to receiving the necessary approvals, we believe that we should be able to structure our affairs so that post conversion, we are able to start our new financial year on 1 April 2003 with at least £400m of distributable reserves. This needs to be considered in the context of a dividend cost for the financial year ending 31 March 2002 of £18.2m. Investment trust requirements There are a number of ongoing requirements to be met if a company is to continue to qualify for the benefits of investment trust status. These will be explained in the forthcoming circular to shareholders. One such requirement is that the company must not be a close company at any time during the financial year for which investment trust status is sought. Whilst satisfying this requirement is outside Caledonia's control, the Board believes that Caledonia is not a close company and the Board considers that it is reasonable to expect that the company will continue not to be a close company on an ongoing basis. Business flexibility Caledonia believes that conversion to investment trust status will not result in any significant change to its investment approach nor restrict the implementation of its investment strategy in any material way. Planned Timetable A circular will be sent to shareholders in January 2003. This will detail the investment trust conversion proposal and the shareholder approvals necessary for us to be able to convert to investment trust status in a way that we believe is most beneficial to shareholders. This will be followed by the necessary shareholder meetings in February 2003. Providing the required approvals are forthcoming, we plan to implement the changes necessary for us to enjoy investment trust status as from the beginning of our new financial year on 1 April 2003. Investment trust status is granted retrospectively by the Inland Revenue after the end of each relevant accounting period, the first of which will end on 31 March 2004. It may, therefore, be some time before formal approval is received. Competitive Advantages We believe that investment trust status, together with the strategy outlined above, will further enhance Caledonia's existing competitive advantages in relation to other investment companies. In particular, these are: Favoured access to investment opportunities Caledonia has a long established and valuable reputation as a supportive long term constructive investor and is not constrained by time limits dictating realisation policy nor by industry sector whims. Moreover, we have a strong track record for taking a proactive approach to growing the businesses in which we invest. These factors attract a strong deal flow of opportunities not always available to others and therefore enable us to be more selective in our choice of investments. Experienced and stable management Caledonia has a stable management team with good experience in influencing constructively the management of investee companies. In addition, we work proactively with investee company management to identify and promote business growth opportunities. Although such an approach is common in the private equity area, it is much less so in the quoted company arena. Value creation The large majority, by value, of Caledonia's investments are managed in-house, thereby reducing third party fees and ensuring that performance gains on these investments accrue to Caledonia's shareholders. In addition, in the cases where assets are to be managed by third parties, we seek to secure a stake in the asset management business as part of the overall arrangements. This should provide the opportunity for additional value creation from the asset management business itself, further enhancing the potential returns. Underpinning of dividends The proposal to maintain a high level of distributable reserves at conversion to investment trust status should give Caledonia a very much greater ability to pursue a progressive dividend policy for the foreseeable future than is normally the case for investment trusts. Conclusion Our long term track record and performance for shareholders is excellent and has been achieved without the benefit of investment trust status. We believe that going forward we will be in an even better position to create value for our shareholders. Financial Review Net Asset Value During the six months ended 30 September 2002, net asset value ('NAV') shown in the group balance sheet, which consolidates subsidiaries and equity accounts for associates, decreased by £73.2m or 10% from £737.9m to £664.7m. Expressed on a per share basis, the decrease amounted to 9%, from 1010 pence to 915 pence. The decline in adjusted NAV per share (the basis of calculation of which is set out below), was 20%, from 1172 pence to 941 pence. The principal factor in the balance sheet NAV movement was the overall decrease in the revaluation of investments of £56.3m, which came mainly from the financial and technology sectors. Investment sales in the period realised net gains of £7.2m. Other factors affecting the balance sheet NAV movement included profit for the six month period of £10.7m, offset by the interim dividend of £5.7m, exchange losses on translation of overseas subsidiaries of £17.7m and the purchase of 446,000 of its own shares amounting to £3.4m. Profit for the period of £10.7m, compared with £6.3m for the same period last year. Significant factors in this increase were a £1.4m improvement in trading profit, a small reduction in group overheads and a £2.8m profit on sale of operations, which included a book profit on the dilution of our interest in Close Brothers as a result of that company issuing shares to a new investor. Adjusted NAV per share declined at a greater rate than balance sheet NAV per share. The principal factor in this difference was that adjusted NAV per share reflected a 34% drop in the market value of Close Brothers shares, whereas the balance sheet NAV per share reflected a 12% increase in the group's share of Close Brothers' net assets. Dividends The Board has declared an interim dividend of 8.0 pence per ordinary share, a 2.6% increase on last year, at a cost of £5.7m. The dividend will be paid on 9 January 2003 to shareholders registered on 6 December 2002. Cash Flow The group's net funds were £51.1m. at the half year end, compared with £67.1m at the last year end, a decrease of £16.0m. Significant outflows were the purchase of investments of £22.6m, notably in the Aberforth and Polar Capital Japan funds for a total of £14.6m, and the dividend payments of £12.4m. The principal inflows arose from investment sales, which totalled £18.9m. Valuation of Investments At 30 September 2002, the group applied a revised methodology to the valuation of its unquoted investments, based on the BVCA guidelines. In addition, the basis of calculation of adjusted NAV (which previously amended the balance sheet to include listed associates at valuation) was revised to include all associates and subsidiaries at market value in accordance with the new methodology. At 30 September 2002, the overall difference in adjusted NAV from the old to new method is a reduction of £6.7m, which represented less than 1% of the value of the investment portfolio. Valuation Methodology Caledonia's revised methodology for valuing unquoted investments is based on the BVCA guidelines. Quoted investments continue to be valued at their mid-market price. Unquoted equity securities are valued on a number of different bases depending on the nature of the investment. Early-stage investments will generally be valued at cost, less a provision if performance is substantially below expectations, for one year or until the investment starts to earn significant maintainable profits. Investments earning significant maintainable profits are generally valued using an earnings multiple, based on current year profit after tax and an earnings multiple for a comparable company or sector average. A discount will be applied to recognise the absence of a ready market on which the holding can be sold. The liquidity discount will normally be 30%, but may be reduced to 10% if an IPO or realisation is imminent or the holding is more than 75%. For some asset-backed businesses, such as where there is a significant property element, the earnings multiple method of valuation is inappropriate, and a net asset basis is applied. It may also be appropriate to use the net asset basis of valuation if this results in a higher valuation than the earnings method, or the company is incurring losses. A third party valuation, such as an independent valuation report or a material arm's length transaction, will provide prima facie evidence of fair valuation and may take precedence over other methods. Unquoted fixed income shares and loan investments are valued at the lower of cost or recoverable amount. Investments in unquoted funds are valued at the NAV of the fund, with an appropriate adjustment where the NAV has not been calculated in accordance with BVCA guidelines. Unaudited Group Profit and Loss for the six months ended 30 September 2002 6 mths 6 mths Year 30 Sep 30 Sep 31 Mar 2002 2001 2002 £m £m £m Group turnover 63.2 56.0 114.1 Trading profit 2.0 0.6 (1.3) Income from investments 4.9 6.0 10.8 Interest net 2.1 (0.3) (1.4) Other income 0.5 0.5 0.8 Group overheads (3.8) (4.3) (8.5) Exceptional item (0.3) - - Total group overheads (4.1) (4.3) (8.5) Group operating profit 5.4 2.5 0.4 Share of operating profit of associates 12.2 12.4 25.2 Amortisation of goodwill on acquisition of associates - 0.3 0.5 Total operating profit 17.6 15.2 26.1 Profit on sale of operations 2.8 (0.4) (6.2) Interest payable (5.7) (5.9) (11.7) Profit on ordinary activities before taxation 14.7 8.9 8.2 Tax on profit on ordinary activities (3.8) (2.6) (5.1) Profit on ordinary activities after taxation 10.9 6.3 3.1 Minority interests (equity) (0.2) - (0.2) Profit for the financial period 10.7 6.3 2.9 Dividends (5.7) (5.8) (18.2) Profit retained for the financial period 5.0 0.5 (15.3) Earnings per ordinary share Basic 14.9p 8.1p 3.8p Diluted 14.9p 8.1p 3.8p Adjusted basic 13.2p 9.9p 18.6p Dividends per ordinary share 8.0p 7.8p 25.0p Unaudited Group Reserve Movements for the six months ended 30 September 2002 TOTAL RECOGNISED GAINS AND LOSSES 6 mths 6 mths Year 30 Sep 30 Sep 31 Mar 2002 2001 2002 £m £m £m Profit for the financial period 10.7 6.3 2.9 Realised gains and losses on sale of investments 7.7 0.8 7.9 Provision against investments (34.7) (1.1) (11.5) Movement in revaluation reserve (18.1) (60.8) (24.9) Tax on sale of investments (2.8) (1.1) (1.5) Exchange differences (16.4) (5.5) 0.1 Minority interests (equity) 0.1 (0.1) (0.1) Share of reserve movements of associates Realised gains and losses on sale of investments (0.5) 1.1 1.4 Movement in revaluation reserve (10.7) (21.0) (20.4) Exchange differences (1.3) (0.6) (1.2) Other movements - 0.7 0.5 Total recognised gains and losses (66.0) (81.3) (46.8) RECONCILIATION OF SHAREHOLDERS' FUNDS 6 mths 6 mths Year 30 Sep 30 Sep 31 Mar 2002 2001 2002 £m £m £m Total recognised gains and losses (66.0) (81.3) (46.8) Dividends (5.7) (5.8) (18.2) (71.7) (87.1) (65.0) Purchase of own shares (3.4) (36.0) (47.1) Goodwill on disposals written back 1.9 (0.5) (5.5) Share of goodwill movements of associates - 0.8 0.7 Net movement in shareholders' funds (73.2) (122.8) (116.9) Opening balance of shareholders' funds 737.9 854.8 854.8 Closing balance of shareholders' funds 664.7 732.0 737.9 Unaudited Group Balance Sheet At 30 September 2002 30 Sep 30 Sep 31 Mar 2002 2001 2002 £m £m £m Fixed assets Intangible assets 7.2 11.0 7.5 Tangible assets 66.2 68.7 68.0 Investments Investment in associates 277.3 389.9 289.4 Other investments 266.2 329.4 316.7 616.9 799.0 681.6 Current assets Stocks 23.5 16.1 21.3 Debtors 26.7 31.6 31.2 Short term deposits 45.4 10.6 61.0 Cash at bank and in hand 24.1 21.8 20.2 119.7 80.1 133.7 Creditors falling due within one year Short term borrowings (13.4) (81.5) (8.8) Other creditors (26.9) (30.8) (33.4) (40.3) (112.3) (42.2) Net current assets 79.4 (32.2) 91.5 Total assets less current liabilities 696.3 766.8 773.1 Creditors falling due after more than one year Long term borrowings (5.0) (5.4) (5.3) Provision for liabilities and charges Deferred taxation (25.8) (28.0) (29.0) 665.5 733.4 738.8 Minority interests (equity) (0.8) (1.4) (0.9) 664.7 732.0 737.9 Capital and reserves Called up share capital 4.1 4.1 4.1 Share premium account 1.3 1.3 1.3 Capital redemption reserve 1.1 1.1 1.1 Revaluation reserve 54.6 36.5 73.9 Profit and loss account 603.6 689.0 657.5 Shareholders' funds (equity) 664.7 732.0 737.9 Net asset value per ordinary share 915p 985p 1010p Adjusted net asset value per ordinary share 1 941p 1014p 1172p 1. Refer to the financial review. Unaudited Group Cash Flow For the six months ended 30 September 2002 6 mths 6 mths Year 30 Sep 30 Sep 31 Mar 2002 2001 2002 £m £m £m Net cash inflow from operating activities 3.2 6.8 10.2 Dividends from associates 4.1 3.8 9.5 Servicing of finance Interest paid - (0.1) (0.3) Dividends paid to minority shareholders - - (1.0) - (0.1) (1.3) Taxation (3.6) (1.0) (2.0) Capital expenditure and financial investment Purchase of tangible fixed assets (1.8) (3.2) (5.1) Sale of tangible fixed assets 0.1 0.1 0.4 Purchase of investments (22.6) (27.8) (39.6) Sale of investments 18.9 21.1 83.4 (5.4) (9.8) 39.1 Acquisitions and disposals Purchase of operations (0.3) (0.2) (0.1) Sale of operations (0.3) - - Investment in associates (1.8) (4.6) (6.2) Sale of interests in associates (0.1) 0.5 92.0 (2.5) (4.3) 85.7 (4.2) (4.6) 141.2 Equity dividends paid (12.4) (12.7) (18.5) Management of liquid resources 20.3 (1.7) (52.0) Financing (0.3) 27.9 (22.3) Purchase of own shares (3.4) (28.5) (47.1) Increase in cash in the period - (19.6) 1.3 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS 6 mths 6 mths Year 30 Sep 30 Sep 31 Mar 2002 2001 2002 £m £m £m Group operating profit 5.4 2.5 0.4 Depreciation and amortisation 2.8 3.0 9.0 Profit on sale and provision against own shares (0.1) 0.1 - Profit on sale of fixed assets - - (0.1) Investment income and interest accruals increase (0.1) (0.3) 0.4 Stocks increase (2.4) 0.4 (4.8) Debtors increase (0.2) 6.8 6.4 Creditors decrease (2.2) (5.7) (1.1) Net cash inflow from operating activities 3.2 6.8 10.2 Supplementary Information Exceptional Item The exceptional item of £0.3m related to the accrued costs to date in respect of the proposed conversion to an investment trust. Taxation Taxation charged to the profit and loss account included £2.4m (2001 - £2.6m) in respect of associated companies. Earnings per Ordinary Share The calculation of basic earnings per ordinary share was based on the 72,246,000 (2001 - 77,542,000) weighted average number of ordinary shares in issue during the period excluding shares held by the Caledonia Investments plc Employee Share Trust and a subsidiary. Diluted earnings per ordinary share took into account the 12,000 (2001 - 46,000) dilutive potential ordinary shares from employee share option schemes. Adjusted basic earnings per ordinary share excluded sale of operations, amortisation of goodwill and other items, net of attributable tax. Net asset value per Ordinary Share The calculation of net asset value per ordinary share was based on the 72,613,000 (March 2002 - 73,059,000) ordinary shares in issue at the end of the period. Adjusted net asset value per ordinary share included subsidiaries and associates at valuation. Net asset value per share and adjusted net asset value per share excluded contingent tax on investment revaluation. Analysis of Changes in Net Funds Opening Exchange Acquisition Closing balance differences of operation Cash flow balance £m £m £m £m £m Cash at bank and in hand 20.2 (0.8) 0.1 4.6 24.1 Bank overdrafts (8.7) - - (4.6) (13.3) 11.5 (0.8) 0.1 - 10.8 Short term deposits 61.0 - 4.7 (20.3) 45.4 Debt due within one year (0.1) - - - (0.1) Debt due after more than one year (5.3) - - 0.3 (5.0) 67.1 (0.8) 4.8 (20.0) 51.1 Basis of Preparation and Issue of Interim Report The interim report has been prepared on the basis of the accounting policies set out in the 2002 group accounts and is unaudited. The Board approved the interim report on 21 November 2002. The results for the year ended 31 March 2002 do not constitute the company's statutory accounts. The statutory accounts for that period, which received an unqualified audit report, have been filed with the Registrar of Companies. The interim report will be posted to shareholders and copies will be made available at the registered office of the company at Cayzer House, 30 Buckingham Gate, London SW1E 6NN. Portfolio Analysis Major Investments by Sector Valuation 5 Book value Name Business Holding Sep 2002 Mar 2002 Sep 2002 Mar 2002 % £m £m £m £m Financial Close Brothers Group plc1 Merchant banking 17.7 124.0 189.2 89.5 80.0 ICAP plc1 Interdealer broking 3.8 31.8 31.0 31.8 31.0 Rathbone Brothers Plc1 Fund management 11.7 26.4 36.3 26.4 36.3 ISIS Asset Management plc1 Fund management 6.2 16.9 20.0 16.9 20.0 Other 5.7 8.7 5.6 8.8 204.8 285.2 170.2 176.1 Leisure and media Kerzner International Ltd1 Resort operator 20.6 84.9 111.4 96.3 105.4 The Sloane Club Group Ltd Residential club 100 29.0 16.1 16.8 16.1 Radio Investments Ltd Local radio 39.4 12.4 15.5 12.3 13.8 Other 4.9 5.0 4.9 5.5 131.2 148.0 130.3 140.8 Property and general Quintain Estates and Property investment 7.1 20.7 19.8 20.7 19.8 Development PLC1 Buckingham Gate Ltd Property investment 100 19.9 20.8 22.0 20.8 Edinmore Holdings Ltd Property trading 100 11.2 3.4 10.9 3.4 Paladin Resources plc1 Oil and gas 6.4 11.1 6.5 11.1 6.5 Other 54.8 72.0 51.6 72.5 117.7 122.5 116.3 123.0 Industrial and services Offshore Logistics Helicopter operator 5.9 29.9 32.4 29.9 32.4 Inc1,2/Bristow Amber Industrial Holdings PLC Specialty chemicals 100 22.2 34.1 31.6 34.1 Sterling Industries PLC Engineering 100 17.8 23.1 21.9 23.1 Wallem Group Ltd3 Shipping services 74.4 12.7 13.2 12.7 13.2 Other 28.3 37.4 30.9 31.8 110.9 140.2 127.0 134.6 Investment funds British Empire Securities and Investment trust 19.8 51.3 62.3 54.6 65.7 General Trust plc1 Aberforth Ltd Partnership 1A Investment fund 25.5 17.3 10.0 17.3 10.0 Other 29.7 34.9 29.7 34.9 98.3 107.2 101.6 110.6 Technology Other 19.8 32.0 18.9 31.3 19.8 32.0 18.9 31.3 Sector total 682.7 835.1 664.3 716.4 Cash and deposits4 24.3 51.2 24.3 51.2 Other items (23.9) (29.7) (23.9) (29.7) 683.1 856.6 664.7 737.9 Net asset value per share 941p 1172p 915p 1010p 1. Listed on the UK or overseas stock exchanges. 2. The holding in Offshore Logistics Inc includes £6.6m (Mar 2002 - £7.3m) of loan stock. 3. The holding in Wallem Group Ltd comprises 26% of voting ordinary shares and 91.2% of non-voting ordinary shares. 4. Excludes cash and deposits in subsidiaries treated as part of the investment portfolio. 5. Valuation basis is the same as that used for the adjusted net asset value per share in the financial review, in particular subsidiaries are stated at share of net assets at March 2002 rather than market value. After providing for contingent tax on investment revaluation of £20.0m (March 2002 - £46.0m), the adjusted net asset value per share (based on the portfolio at valuation) was 913p (March 2002 - 1109p). Currency Profile of Adjusted Net Asset Value Currency £m Sterling 511.2 75% US Dollar 142.1 21% Euro 16.8 2% Hong Kong Dollar 12.7 2% Other 0.3 - Adjusted net asset value 683.1 100% The exposure of the portfolio is based on the currency in which the shares or other financial instruments held are denominated. It does not take account of currency exposures arising within the investments themselves. Twenty Largest Investments Name Business £m Close Brothers Group plc1 Merchant banking 124.0 18% Kerzner International Ltd1 Resort operator 84.9 12% British Empire Securities and General Trust plc1 Investment trust 51.3 7% ICAP plc1 Interdealer broking 31.8 5% Offshore Logistics Inc1 / Bristow Helicopter operator 29.9 4% The Sloane Club Group Ltd Residential club 29.0 4% Rathbone Brothers Plc1 Fund management 26.4 4% Amber Industrial Holdings PLC Specialty chemicals 22.2 3% Quintain Estates and Development PLC1 Property investment 20.7 3% Buckingham Gate Ltd Property investment 19.9 3% Sterling Industries PLC Engineering 17.8 3% Aberforth Ltd Partnership 1A Investment fund 17.3 3% ISIS Asset Management plc1 Fund management 16.9 2% Wallem Group Ltd Shipping services 12.7 2% Radio Investments Ltd Local radio 12.4 2% Edinmore Holdings Ltd Property trading 11.2 2% Paladin Resources plc1 Oil and gas 11.1 2% A G Barr plc1 Beverages 7.4 1% Central European Land Ltd Property investment 7.2 1% Scudder Latin American Power II Investment fund 5.0 1% Other 123.6 18% Portfolio total 682.7 100% 1. Listed on the UK or overseas stock exchanges. Independent Review Report by KPMG Audit plc to Caledonia Investments plc Introduction We have been instructed by the company to review the financial information set out between the heading 'Unaudited group profit and loss' to the end of the section 'Basis of preparation' and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' Responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where they are to be changed in the next annual accounts in which case any changes, and the reasons for them, are to be disclosed. Review Work Performed We conducted our review in accordance with guidance contained in Bulletin 1999/ 4: Review of Interim Financial Information issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review Conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 September 2002. KPMG Audit Plc Chartered Accountants London 21 November 2002 This information is provided by RNS The company news service from the London Stock Exchange

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