Another solid year

City of London has announced its results for FY2019. The headline figures of £11.4m PTP and undiluted EPS of 34.9p were in line with July’s trading statement, meaning the interest for investors was in the details. Although FUM ended the year up by more than 5%, at $5.39bn, average FUM for fee collection was slightly lower ($5.1bn in FY2019 compared with $5.2bn in FY2018). Combined with the ongoing decline in fee rates from the increase in the diversification areas, revenue declined almost 6% to $31.9m. Staff costs increased with the recruitment of the new REIT team, with offsets from reduced commissions and other administrative costs.

• EM strategy: Market performance gave a slight boost to FUM, although the EM strategy outperformance was more significant. More detail on flows shows that EM is still attracting new funds, but rebalancing remains a hurdle to growing FUM in this area.
• Cash: Cash conversion was, as usual, excellent, at 114% of earnings (boosted by working capital changes). Cash on the balance sheet declined due to REIT strategy seed funding, the special dividend and buybacks. At £13.8m, it is still more than adequate, and there remains scope for further return of capital.
• Valuation: The 2020E P/E of 9.4x is at a significant discount to the peer group. The underlying 2020E yield of 6.6% 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. FY2017 and FY2018 both saw dividend increases and, unless there is significant market disruption, more should follow in the next few years.