The full year results from City of London showed no surprises following the trading statement in July. Weaker markets were the dominant feature, with lower funds under management compared to FY2015 leading to a fall in revenues and profits in FY2016. Revenues declined 4% over the previous financial year to £24.4m and operational gearing led to a larger 11% fall in pre-tax profits to £8.0m. As usual, cash conversion was excellent with net operating cashflow at 96% of profits.
- Market improvements: The final quarter of FY2016 saw a recovery in Emerging Markets which has continued since the financial year end. FUM have grown to $4.4bn, a 10% improvement since the year end.
- Dividend: The dividend for the full year has been kept unchanged. It was marginally uncovered for the year as a whole at 0.97x, but was covered on a run rate basis in the final quarter. With cash balances back over £10m there is more than ample reserve to cover the small shortfall.
- Valuation: After the recent upgrades the prospective P/E of 11.4 times is now at a discount to the peer group. The yield of 6.5% is very attractive and should at the very least provide support for the shares in the current volatile markets. At current market levels we’d expect dividend cover to be restored in 2017.
- Risks: To date, City of London has not experienced the sort of outflows that some other emerging market fund managers have, aided by its good performance and strong client servicing. Further EM volatility may increase the risk of such outflows however.
- Investment summary: City of London has continued to show robust performance in challenging market conditions. The valuation remains reasonable. At current FUM and exchange rates, dividend cover will be restored in FY2017 adding to investors comfort.