Interim results validate good first half performance

City of London has announced its interim results for 1H’20. Several of the key figures were announced in the January trading statement, so the main interest is in the underlying figures. With FUM growth supported by positive markets and net inflows, revenue growth was good at 11% compared with the same period last year. Despite the helpful conditions, City of London maintained its excellent cost control and the net result was a 23% increase in profit after tax to $5.06m. Cash conversion, as always, was excellent, with operating cashflow at 107% of earnings.

• Performance: Further detail was provided on fund performance over the period. The Developed strategy outperformed by an average of 3.5% and Opportunistic Value by an average of 2.2%. EM averaged 0.75% as well and all have strong quartile placings over multiple timescales.
• Earnings estimates: As the main figures were given in January, there are only small adjustments to the Hardman & Co earnings estimates. We have introduced a 2022E EPS of 54.5p. A further dividend increase is also assumed, but strong markets may see another one before then.
• Valuation: The 2021E P/E of 9.2x 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. FY’18 and 1H’20 both saw dividend increases and, unless there is significant market disruption, more should follow in the next few years.