City of London issued a trading statement for the 2016 financial year. The figures were a little better than expected, some of which was due to exchange rate effects. Funds under management finished the year at $4.0bn, which was a 5% decrease in dollar terms from a year ago but an 11% increase in sterling terms to £3.0bn. Pretax profits are expected to be £8.0m, with basic eps of 23.6 (0.1p higher than our estimate). As expected a final dividend of 16p was announced, bringing the total for the year to an unchanged 24p.
In dollar terms the MSCI Emerging Markets Index fell 12% over the year, compared to 5% in FUM. We believe that the larger part of this is new business flows, though the EM CEF strategy again outperformed. There is no news on prospective flows.
There is no new news on operations, though we note that City of London has continued to maintain its excellent cost control. The company notes that with their focus on Emerging Markets and with predominantly US clients the operational impact of Brexit is very slight.
The prospective P/E of 13.3 times is in line with the peer group. The yield of 7.6% 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.
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.
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.