City of London has announced its pre-close trading update for FY2019. After a volatile fourth quarter, FUM finished ahead of the end-March figure, at $5.39bn. This was an increase of $282m (5.5%) over a year ago, of which $96m was net inflows, with the balance from market movements. As indicated in the quarterly statements, both the Developed Markets and Opportunistic Value strategies saw net inflows over the year. Emerging Markets and Frontier Markets experienced net outflows. Performance in the Emerging Markets strategy was good, with outperformance of ca.300bps over the year.
- Operations: Expected pre-tax profit for the year will be £11.4m, which, after tax and deducting of non-controlling interests, gives £8.8m attributable to shareholders. This a very slightly ahead of our forecast of £8.7m. Basic and diluted EPS are expected to be 34.9p and 34.1p, respectively.
- Dividend: The recommendation is for a final dividend of 18p, the same as last year. This will bring the total for the year to 40.5p, including the special dividend of 13.5p. The underlying dividend of 27p is covered 1.26x by fully-diluted earnings.
- Valuation: The 2020E P/E of 10.1x is at a significant discount to the peer group. The underlying 2020E yield of 6.4% is attractive, in our view, and should, at the very least, provide support for the shares in the current markets.
- Risks: Although emerging markets can be volatile, City of London has proved to be more robust than some other EM fund managers, aided by its good performance and strong client servicing. Further EM volatility could raise the risk of such outflows, although increasing diversification is also mitigating this.
- Investment summary: Having shown robust performance in challenging market conditions, City of London is now reaping the benefits in a more supportive environment. The valuation remains reasonable. FY’17 and FY’18 both saw dividend increases and, unless there is significant market disruption, more should follow in the next few years.