City of London Investment Group Tough 1H trading update

City of London Investment Group  (LON:CLIG) 1H trading update released this morning reveals details of lower Group Funds under Management (FuM) and reduced operating profitability:

In 1H to Dec, FuM fell 9.4% to US$4,625m, with the MXEF Index down 9.7%; Year-on-Year FUM fell 12.5%, while the MXEF Index fell 16.6%;

1H flows were $42m negative: $136m of net inflows to the Developed and Opportunistic Value strategies (1Q $124m; 2Q $12m), and $157m net outflow from Emerging Market (1Q $95m; 2Q $62m) and $21m of net outflow from Frontier (1Q $21m; 2Q none) strategies.

1H investment performance was negative: the statement echoes the 1Q statement which referred to “underlying close-end fund manager underperformance” and “widening discounts”.

Unaudited 1H PBT of £5.2m is 21% below 1H18 PBT: £6.6m. The run rate for operating profit before profit share of 30% and estimated EIP charge of 5% is now approximately £1.2m per month (1Q19: £1.4m a month);

The statement includes a graph based on assumptions, which compares an illustrated profit after tax to an estimated quarterly cost of a maintained dividend.
CLIG’s interims will be on Monday 18 February.

Zeus view. This statement reveals lower current year FuM, lower net inflows, lower average revenue margin (Developed and Opportunistic Value strategies have lower margins than EM strategies) and lower interim PBT than we had forecast.
We have adjusted our forecasts (set in July 2018 and based on average FUM of US$5.3bn) to US$5.2bn, which results in a 9% cut to FY19E revenues, 16% cut to FY19E PBT, Adj EPS and DPS (i.e. a maintained DPS of 27p).

We have also rebased the FY20E forecasts to reflect 9% lower average FuM, 10% lower revenues, 16% lower PBT and 16% lower EPS and DPS.
At 30 June 2018, the group had no debt and £19.7m (73.8p per share) of net cash.
Valuation. CLIG shares at 375p are trading on 11.0x current year and 7.2% dividend yield compared to market PER of 11x for Emerging Markets and 12.0x for the FT All Share. CLIG’s 7.2% dividend yield is based off a 27p full year dividend, which is 2.7x covered by net cash.

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