15 September 2015
By Maynard Paton
Quick update on City of London Investment (CLIG).
Summary: No surprises here, as everything important was revealed within July’s summary figures. However, CLIG did confirm its funds under management had dropped by 17% during the recent market downturn and my sums are now starting to ask questions about the 24p per share dividend. All told, I do not feel comfortable with the current valuation and have therefore decided to reduce my holding.
Shares in issue: 26,861,207
Market capitalisation: £88.6m
Click here for my previous CLIG posts
* These figures were already flagged back in July
CLIG published a summary of these annual results two months ago, so there were no major surprises.
However, sharp-eyed investors may have noticed that some of the latest numbers differed slightly to those within the earlier summary. Earnings per share for example was reported as 26.1p during July but has since changed to 26.4p.
The adjustments concern the money CLIG has itself invested in some of its own funds. The annual gains (or losses) on these particular ‘in-house’ investments are now added (or subtracted) from overall profits, rather than accounted for purely through the balance sheet.
* £1m spent on buying shares for the employee share trust
I noted at the half-year stage that CLIG had spent £1m buying shares for its employee benefit trust (EBT).
Though no further sums were spent on the EBT during the second half, it is worth keeping an eye on this expenditure. Essentially the cash spent on EBT shares reflects the cost of the share options granted to staff. You see, when those options are exercised, the resultant shares are taken from the EBT to keep dilution to a minimum.
Anyway, during the last five years, some £3.6m has been pumped into the EBT — an average of more than £700k a year. In contrast, the share-based payment charge reported against earnings for 2015 was just £10k.
At least the EBT currently covers 94% of CLIG’s outstanding options, and those options not covered by the EBT represent only 0.4% of the total share count.
* No changes to the important charts and tables in the annual report
The 2015 annual report repeated all the important charts and tables that accompanied July’s statement.
As such, it seems CLIG’s funds are still outperforming, are still expected to garner an extra $500m of client money within the next twelve months, and are still projected to produce earnings of £7.3m for shareholders for 2016…
* Client funds have dropped 17% since the year end
The annual report — but not the accompanying results RNS — revealed that CLIG’s funds under management (FUM) had dropped considerably since the June year-end:
“It should be noted that FuM have fallen from US$4.2 billion at the point of putting together this Template, to US$3.5 billion at the time of writing. Whilst as a firm we are used to this level of volatility this has been all market related and caused by falls in the markets where clients are exposed rather than client redemptions.”
I had already noticed this FUM decline but I am pleased CLIG has claimed it has been “all market related”.
The annual report also disclosed CLIG’s top ten clients represent around 48% of total FUM, with the largest representing 13% and the second-largest at almost 9%. So there is a risk to profits here if just one or two major clients decide to jump ship.
…indicates earnings could now be running at £5.2m — or 19.3p per share — with £1 buying $1.55 and FUM at $3.5bn.
That projection may well ask some questions of the 24p per share dividend, which has already been thinly covered by earnings — 1.0x, 0.9x and 1.1x — during the last three years.
Right now though, it seems to me the 330p share price may be expecting a prompt FUM recovery. I reckon the shares trade at 14-15 times my 19.3p per share earnings guess, based on an enterprise value of £79m or 292p per share (net cash is about £10m or 38p per share).
* I have decided to sell part of my holding
True, CLIG’s earnings may improve in time if markets pick up and new clients are found. Furthermore, the ending of a legacy marketing agreement could provide extra profits of up to £2m by 2020.
Nonetheless, the last time CLIG’s FUM dropped to $3.5bn (between mid 2013 to early 2014), the share price fell to as low as 215p.
Simply put, I just worry that FUM remaining depressed at about $3.5bn for a prolonged period could spark a repeat share-price downturn — which would thump my portfolio’s returns given CLIG was my second-largest investment at the end of Q2.
Indeed, a 215p share price and my 19p per share earnings guess equate to a P/E of 9-10, which could be seen as quite fair if FUM does remain depressed for some time.
Don’t get me wrong, CLIG retains many attractive features — not least its owner-friendly boss, appealing accounts and comprehensive updates for shareholders.
But I didn’t feel all that comfortable with the immediate downside possibilities — plus I wanted to have some extra on hand to bag potential bargains elsewhere.
* Next update — AGM and trading statement 19th October.
Disclosure: Maynard owns shares in City of London Investment.