With most of the main figures having been announced in last month’s trading statement, the first half results from City of London contained no surprises. With weak markets having adversely affected funds under management, revenues fell from £12.2m to £11.8m. Earnings for the period were also reduced by a loss on seed investments of £135,000 and came in at £2.6m. As usual, the cash conversion was excellent at 93% and City of London finished the half with a cash balance of £8.4m. In its outlook the company notes some contrarian behaviour from investors, suggesting the new business prospects remain good.
- Funds under management: As previously stated, inflows offset some of the market falls with FUM in the first half down 11% compared to 17% for the MSCI Emerging Markets Index. The market turmoil in January has had a further effect, with FUM at $3.5bn as of 31 January.
- Dividend: As expected an interim dividend of 8p was announced and we expect the full year to be unchanged. Although the dividend seems likely to be uncovered in 2016, the shortfall can be easily covered from the company’s cash balances.
- Valuation: The prospective P/E of 13.5 times is now at a slight premium to the peer group. The yield of 8.4% is very attractive and should at the very least provide support for the shares in the current volatile markets.
- 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. Without a market recovery the dividend may be uncovered in 2016, but with over £8m of cash the company can easily cover the gap that current market levels imply.