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City of LondonInvGrp (CLIG)

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Wednesday 28 January, 2009

City of LondonInvGrp

Half Yearly Report

RNS Number : 3503M
City of London Investment Group PLC
28 January 2009
 



28th January 2009


CITY OF LONDON INVESTMENT GROUP PLC

('City of London' or 'the Group')


HALF YEAR RESULTS FOR THE SIX MONTHS TO 30th NOVEMBER 2008


City of London (AIM: CLIG), a leading emerging market and natural resource asset management group, announces half year results for the six months to 30th November 2008.


SUMMARY


  • Funds under management (FUM) of US$2.12 billion at the half year end (US$4.59 billion at 30th November 2007 and US$4.71 billion at the last year end on 31st May 2008)
  • Operating profit of £3.3 million (2007: £4.8 million)
  • Dividend strategy maintained, albeit at a temporarily reduced annual cover - interim dividend of 5p per share declared to be paid on 2nd March 2009 to shareholders on the register on 13th February 2009 
  • Net cash generated from operations of £2.3 million (2007: £3.2 million)
  • Cash balances of £4.15 million at the period end (2007: £8.1 million) with no borrowings - reduction due to increased dividend payments and the £5.8 million purchase for cancellation of ordinary shares in City of London as part of the placing out of a founder shareholder's stake in February 2008. 


Andrew Davison, Chairman, said, 'We take comfort from the tried and tested robustness of our business model and continue to believe that this will allow us to retain and attract clients through investment out-performance and to reward our shareholders with meaningful dividends.'


Barry Olliff, CEO, added, 'Shareholders will by now be well aware of some of our core values: we don't use leverage, we are very aware of counterparty risk issues, we don't undertake stock lending, we don't allow employees to trade in the securities that we research and trade on behalf of clients, we don't manage hedge funds (not because we don't like the structure but because we do not believe that as the industry is presently constructed, clients get a fair deal) and we attempt - via a formulaic approach - to clearly define the relationship between staff bonuses and shareholder earnings and dividends.  


'We have these core values not just because we are conservative but because we believe that we are entering a new world where fund managers (and banks) will be expected to be significantly more open and accountable than in the past. I would however make the additional point that these have also been our core values for many years.'


For further information, please visit www.citlon.co.uk or contact:


Doug Allison

Jeff Keating

Simon Hudson

Finance Director

Simon Brown

Andrew Dunn

City of London Investment Group plc

Teathers

Tavistock Communications

Tel: 020 7711 0771

Tel: 020 7426 9000

Tel: 020 7920 3150





Tom Price



Chris Sim



Evolution Securities Limited



Tel: 020 7071 4300



Chairman's Statement


Our principal investment markets, in common with developed equity markets globally, declined very substantially over the six months to end November 2008 with by far the larger part of the fall taking place in the second quarter of the period. As a result of these declines, we announced at the beginning of December that Group funds under management (FUM) had reduced by 55% during the first half, compared to a 56% fall in the MSCI Emerging Markets Index (MXEF) during the same period.  


City of London's business model has always been based on the proposition that the volatility inherent in the markets in which the Group is active can best be mitigated and managed for shareholders by keeping the fixed cost base as low as possible. Our focus on costs has meant that, even during this challenging period for markets worldwide, profits have declined by significantly less than the falls in the MXEF and FUM, helped of course by sterling's weakness against the US dollar.


Results

Basic earnings per share, after a 33% tax charge of £0.9 million (2007: £1.8 million representing 33% of pre-tax profit), was 7.8p (2007: 14.5p). Diluted earnings per share was 7.1p (2007: 12.8p).


Funds under management as at 30th November 2008 were US$2.12 billion (£1.38 billion) compared to US$4.59 billion (£2.23 billion) at 30th November 2007 and US$4.71 billion (£2.38 billion) at 31st May 2008. The falls in value of emerging markets investments, together with our long term record of benchmark out-performance, has recently led many of our clients to increase their weighting to our asset class - a process that is continuing. These rebalancings, and a subscription of some US$300 million from what will become the Group's largest client to date, are described in more detail in the Chief Executive's Review below.


Revenue, our fees charged on funds under management, reduced to £10.4 million (2007: £12.1 million), a decline of 14%. Operating profit, after lower administrative expenses of £7.2 million ((2007: £7.4 million), fell by 31% to £3.3 million (2007: £4.8 million). The staff cost element of administrative expenses was reduced by 17.7% to £3.4 million (2007: £4.1 million) as a result of lower payments and accruals for the profit-related compensation that forms a significant proportion of the Group's total staff remuneration.


Balance sheet totals have also declined substantially due to several factors: the lower cash balances; the reduced level of net current assets as FUM and revenue fell; the reduction in value of the Group's short term investments held to seed new funds; and the marked decrease in deferred tax recoverable as a result of the fall in the City of London share price. This last factor is because the assumed taxable gains from potential option exercise have shrunk significantly and these gains are a deduction from future taxable profits. The value of available-for-sale financial assets fell significantly over the period and is therefore reflected in the movement in the income statement as an impairment charge.


Dividends

City of London's dividend strategy remains largely unchanged with payments per share to be covered approximately one and a half times by earnings per share, paid as to one third/two thirds between the interim and the final. After the disturbing heavy falls in markets, the Board is now becoming more comfortable with the Group's recent - and current - performance albeit at the lower levels resulting from the drop in FUM and has decided to temporarily accept a reduced annual dividend cover. Consequently, the Board has declared an interim dividend of 5p per share (2007: 6p per share), payable on 2nd March 2009 to shareholders on the register on 13th February 2009.


Outlook

At the time of writing, FUM were US$2.2 billion (£1.6 billion) with the increase from the half year end figure reflecting net inflows from new and existing clients. Although this is a positive development for the near term, market uncertainty is such that any predictions have become extremely difficult. However, we have a strong balance sheet with good liquidity. We also take comfort from the tried and tested robustness of our business model and continue to believe that this will allow us to retain and attract clients through investment out-performance and to reward our shareholders with meaningful dividends.


Andrew Davison

Chairman

21st January 2009


 

 

Chief Executive Officer's Review


Without wishing to appear too upbeat, the current market environment seems very different from just a few months ago. VIX (the S&P Volatility Index) is significantly lower, the price of oil has recovered from recent lows and the Emerging Markets as measured via MXEF are around 15% higher than the low of 450 established towards the end of October. Our FUM have also increased, from US$1.95 billion at the low to US$2.20 billion as of 20th January. Included within this figure is US$50 million of the anticipated US$300 million referenced in our recent Trading Update. We have, in addition to the balance of US$250 million still to be funded from this client, a pipeline of around US$70 million additional funding, mainly from existing clients who are rebalancing their exposure to the Emerging Markets after the recent market falls. These additional amounts will be funded over the next few months.


Over the past few months we have continued to develop our business. We have obviously stopped the marketing of our products to potential clients where we anticipated an unproductive response. In this environment, marketing for marketing's sake would clearly be a mistake. It costs money and time and anyway, resources have been better used both educating and meeting with existing clients, but there are areas even in this environment where our plans have developed. In October 2009, our existing contract with North Bridge Capital (NBC) comes to an end and, with one exception in terms of the consultants they deal with, will not be renewed. This is not a reflection of any dissatisfaction with NBC - on the contrary, that relationship has served us very well, and we hope and believe that it has served them well too. The point is simply that we have reached a stage in the development of our business whereby our interests going forward will be better met through an internalised marketing function, and we have made a senior appointment in the US to help us achieve that goal. We have also made a senior marketing appointment in London, and we believe that this will enable us to continue to develop our business in Europe as well. In both cases the individuals will be rewarded using the same established principles via which we incentivise the rest of our staff. 


In this regard we would like to be seen as acting in a contrary manner from the majority of the rest of our industry. We are taking on staff at what we believe to be the bottom of the market with the intention of developing our business as business opportunities are identified. I would make the point that we have not made any member of staff redundant during this reporting period.


For many years, I have attempted to measure or gauge the emotions of the stock market. I would not suggest for a minute that this approach has consistently been successful. I would also make the point that as with any analysis of behaviour, this approach has to be conducted with relevant risk controls in place. Additionally, it is well worth pointing out that geopolitical issues can also come to the fore within our asset class in a manner that is unlikely to occur in the developed markets. But having said that, a few observations:


  • At its low of around 450, it was estimated that MXEF was trading at around 6.5X 2008 estimated earnings 
  • From its high of 1340 (end October 2007) therefore, MXEF had fallen 70% 
  • At its high it was trading at 13.5X 2008 estimated earnings 
  • At its high it was trading at approximately the same P/E as Europe, Australasia and the Far East (EAFE)
  • At 450 it was trading at a discount of around 30% to EAFE 


My point is that there have been two extreme (behavioural) events that have recently occurred. The first was when MXEF appreciated 40% between the middle of August and the end of October 2007. There was no reason for this. Earnings were not growing at a rate that could be justified by these market movements. Effectively, markets were being moved by investors who had little idea of the risks associated with paying the prices reflected in this index level. As referenced in a previous report to shareholders, MXEF was trading, looked at our way, at around four standard deviations expensive. These were emotional times and it was inevitable that the market levels demonstrated at this time were unsustainable. 


I would now suggest, as with the situation just over a year ago, falls of the order of magnitude that have recently occurred are, in my opinion, unless there is a significant amount of new bad news, equally unsustainable. In my opinion, at or around 450, MXEF is into deeply oversold territory and it would not be surprising to see the index trade at significantly higher levels over the next few months. In my opinion, it is taken as read that there will be a significant supply of ongoing bad news over the next few months, but what MXEF now needs to make new lows is new bad news.


In my opinion, without additional new bad news, if this market follows its predecessors, MXEF in 2009 will have appreciated between 50% and 75% before there is the first sign of good news. This is what occurred in 1999 and 2003 after similar falls under similar emotional circumstances in our asset class.


As a result of recent falls in the markets, we have decided at the half year stage to revalue all of the seed capital that we hold in our business development funds. At present this exposure is via eight funds in areas such as Natural Resources, Developed Closed End Funds and Emerging Closed End Funds. The estimated current value of these investments is US$1.5 million, which compares to the original investments of US$2.5 million. Shareholders may recall that on more than one occasion last year we reduced our seed capital, which had significantly increased in value as a result of market growth. The profit of £459,338 which we took last year has therefore now been offset by a write down of £683,769 in the first six months of this year.


With regard to business development, in my opinion ongoing risk aversion is going to mean that we will in the present environment get a significantly bigger bang for our buck by sticking to areas of the marketplace that we know well and where we have brand recognition. We will therefore focus on our Natural Resource Funds in the US and in Dublin and our Developed Closed End fund in the US, along with Frontier and the existing country exposure in BrazilMexicoChile and Korea. Additionally, we are in the process of establishing an Emerging Markets Plus Fund. This fund will invest in the Emerging Markets via Closed End Funds but will opportunistically be able to invest in Developed Markets when we consider that the Emerging Markets are too high or when Developed Markets (which will also be accessed via Closed End Funds) are attractively priced. This is to be funded initially by an existing client with US$13 million.


By now shareholders will be well aware of some of our core values:


  • We don't use leverage 
  • We are very aware of counterparty risk issues 
  • We don't undertake stock lending 
  • We don't allow employees to trade in the securities that we research and trade on behalf of clients 
  • We don't manage Hedge Funds, not because we don't like the structure but because we do not believe that as the industry is presently constructed, clients get a fair deal 
  • We attempt via a formulaic approach to clearly define the relationship between staff bonuses and shareholder earnings and dividends 


I have written before that we have these core values not just because we are conservative but because we believe that we are entering a new world where fund managers (and banks) will be expected to be significantly more open and accountable than in the past. I would however make the additional point that these have also been our core values for many years.


In a previous reference, I wrote that we would be flexible with regard to our dividend cover policy, which we have stated as one and a half times. We do not see a specific need for earnings retention this year, believing that the cash would be of greater benefit to our shareholders, thus we have based our present estimates on a total dividend one times covered. As usual, and whilst making no forecast for the final dividend, we are intending to pay one third of what we at present believe will be our total dividend at the interim stage. Accordingly, the interim dividend has been fixed at 5p per share.


Over the next few months I will be looking to exercise an option over 189,000 shares, prior to its expiry in May 2009. The exercise price is 29p. Subject to market conditions, my current intention would be to simultaneously sell around half of the resulting shares, such that the overall transaction, net of my personal taxes, is approximately cash neutral.


Barry Olliff

Chief Executive Officer

21st January 2009


Consolidated income statement

For the six months ended 30th November 2008




Six months ended

Six months ended

Year ended



30th Nov 2008

30th Nov 2007

31st May 2008



(unaudited)

(unaudited)

(audited)


Note

£

£

£

Revenue

2

10,445,011 

12,131,322 

24,878,839

Administrative expenses





Staff costs


3,375,673 

4,104,808 

7,925,916 

Other administrative expenses


3,674,925 

3,201,153 

6,968,479 

Depreciation


129,367 

67,628 

158,474 



(7,179,965)

(7,373,589)

(15,052,869)

Operating profit


3,265,046 

4,757,733 

9,825,970 

Impairment of seed investments

3

(683,769)

-

-

Interest receivable and similar income


145,183 

568,849 

868,870 

Profit before tax


2,726,460 

5,326,582 

10,694,840 

Income tax expense


(886,204)

(1,765,999)

(3,559,124)

Profit for the period


1,840,256 

3,560,583 

7,135,716 

Basic earnings per share

4

7.8p

14.5p

29.3p

Diluted earnings per share

4

7.1p

12.8p

26.0p


Group balance sheet

30th November 2008





30th Nov 2007




30th Nov 2008

(as restated)

31st May 2008



(unaudited)

(unaudited)

(audited)


Note

£

£

£

Non-current assets





Property and equipment


835,201 

222,083 

296,740 

Other financial assets


56,796 

49,327 

52,048 

Deferred tax asset


1,083,904 

3,205,865 

3,208,323 



1,975,901 

3,477,275 

3,557,111 

Current assets





Trade and other receivables


2,317,177 

4,324,836 

3,573,214 

Available-for- sale financial assets


893,123 

2,221,397 

1,861,375 

Other financial assets


-

163,677 

30,335 

Cash and cash equivalents


4,152,574 

8,103,454 

5,498,910 



7,362,874 

14,813,364 

10,963,834 

Current liabilities





Trade and other payables


(2,865,281)

(3,397,988)

(3,068,821)

Current tax payable


(621,024)

(1,320,525)

(1,487,571)



(3,486,305)

(4,718,513)

(4,556,392)

Net current assets


3,876,569 

10,094,851 

6,407,442 

Total assets less current liabilities


5,852,470 

13,572,126 

9,964,553 

Non-current liabilities





Deferred tax


-

(206,218)

(193,177)

Net assets


5,852,470 

13,365,908 

9,771,376 

Capital and reserves





Called up share capital


255,155 

267,777 

253,605 

Share premium account


1,396,033 

1,357,283 

1,357,283 

Investment in own shares

5

(2,633,932)

(1,682,667)

(2,811,878)

Revaluation reserve


1,028 

481,175 

450,747 

Share option reserve


1,092,597 

3,398,906 

3,468,673 

Capital redemption reserve


14,172 

-

14,172 

Retained earnings


5,727,417 

9,543,434 

7,038,774 

Total equity 


5,852,470 

13,365,908 

9,771,376 



Consolidated statement of changes in shareholders' equity

For the six months ended 30th November 2008




Share

Investment


Share

Capital




Share

premium

in own

Revaluation

option

redemption

Retained



capital

account

shares

reserve

reserve

reserve

earnings

Total


£

£

£

£

£

£

£

£

At 1st June 2008

253,605

1,357,283

(2,811,878)

450,747 

3,468,673 

14,172

7,038,774 

9,771,376 

Share option exercise

1,550

38,750

177,946 

-

-

-

-

218,346 

Decrease in fair value

-

-

-

(1,133,488)

-

-

-

(1,133,488)

Impairment




683,769 




683,769 

Share-based payment 

-

-

-

-

(9,386)

-

49,999 

40,613 

Deferred tax

-

-

-

-

(2,366,690)

-

18,975 

(2,347,715)

Profit for the period

-

-

-

-

-


1,840,256 

1,840,256 

Dividends paid

-

-

-

-

-

-

(3,220,587)

(3,220,587)

As at 30th November 2008

255,155

1,396,033

(2,633,932)

1,028 

1,092,597 

14,172

5,727,417

5,852,470 




Share

Investment


Share

Capital




Share

premium

in own

Revaluation

option

redemption

Retained



capital

account

shares

reserve

reserve

reserve

earnings

Total


£

£

£

£

£

£

£

£

At 1st June 2007

267,777

1,357,283

(1,573,525)

457,471

2,519,442

-

7,685,181 

10,713,629 

Purchase of own shares

-

-

(301,681)

-

-

-

-

(301,681)

Share option exercise

-

-

192,539 

-

-

-

-

192,539 

Increase in fair value*

-

-

-

23,704

-

-

-

23,704 

Share-based payment

-

-

-

-

81,325

-

-

81,325 

Deferred tax

-

-

-

-

798,139

-

-

798,139 

Profit for the period

-

-

-

-

-

-

3,586,061 

3,586,061 

Dividends paid

-

-

-

-

-

-

(1,727,808)

(1,727,808)

As at 30th November 2007

267,777

1,357,283

(1,682,667)

481,175

3,398,906

-

9,543,434 

13,365,908 


* Net of deferred tax


Cash flow statement

For the six months ended 30th November 2008



Six months ended

Six months ended

Year ended


30th Nov 2008

30th Nov 2007

31st May 2008


(unaudited)

(unaudited)

(audited)


£

£

£

Cash flow from operating activities




Operating profit

3,265,046 

4,757,733 

9,825,970 

Adjustments for:




(Profit)/loss on disposal of assets

5,417 

-

-

Depreciation charges

129,367 

67,628 

158,474 

Share based payment charge

40,614 

81,325 

141,083 

Translation adjustments on investments

(363,102)

72,903 

50,223 

Cash generated from operations before changes in working capital

3,077,342 

4,979,589 

10,175,750 

(Increase)/decrease in trade and other receivables

1,256,037 

(1,711,624)

(960,002)

Increase/(decrease) in trade and other payables

(203,540)

1,235,820 

906,653 

Cash generated from operations

4,129,839 

4,503,785 

10,122,401 

Interest received

123,929 

250,971 

438,109 

Interest paid

-

-

(1,691)

Taxation paid

(1,976,047)

(1,517,777)

(3,161,783)

Net cash generated from operating activities

2,277,721 

3,236,979 

7,397,036 

Cash flow from investing activities




Purchase of property and equipment

(673,245)

(96,349)

(261,852)

Proceeds from sale of non-current 

financial assets

-

14,424 

14,424 

Purchase of current financial assets

-

(1,115,762)

(1,208,121)

Proceeds from sale of current 

financial assets

51,529 

1,284,288 

1,961,075 

Net cash generated/(used) in 

investing activities

(621,716)

86,601 

505,526 

Cash flow generated/from 

financing activities




Proceeds from issue of ordinary share capital

40,300 

-

-

Ordinary dividends paid

(3,220,587)

(1,727,808)

(3,237,691)

Purchase and cancellation of own shares

-

-

(4,544,432)

Purchase of own shares by employee share option trust

-

(301,681)

(1,590,642)

Proceeds from sale of own shares by employee share option trust

177,946 

192,539 

352,289 

Net cash used in financing activities

(3,002,341)

(1,836,950)

(9,020,476)

Net increase/(decrease) in cash and cash equivalents

(1,346,336)

1,486,630 

(1,117,914)

Cash and cash equivalents at start of period

5,498,910 

6,616,824 

6,616,824 

Cash and cash equivalents at end of period

4,152,574 

8,103,454 

5,498,910 


Notes


1. Basis of accounting

The financial information contained herein is unaudited and does not comprise statutory financial information within the meaning of section 240 of the Companies Act 1985. The information for the year ended 31st May 2008 has been extracted from the latest published audited accounts. The report of the independent auditor on those financial statements contained no qualification or statement under s237(2) or (3) of the Companies Act 1985.


The interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting'. The accounting policies are consistent with those set out and applied in the statutory accounts of the Group for the period ended 31st May 2008.


2. Analysis of revenue, operating profit and net assets

The directors consider that the group only undertakes one class of business, and hence only analysis by geographical location is given.




Six months ended



Six months ended

30th Nov 2007

Year ended


30th Nov 2008

(as restated)

31st May 2008


(unaudited)

(unaudited)

(audited)


£

£

£

Revenue




Europe

1,359,253 

1,200,495 

2,811,774 

North America

8,822,179 

10,681,834 

21,541,398 

Other

263,579 

248,993 

525,667 


10,445,011 

12,131,322 

24,878,839 

Operating profit




Europe

662,670 

559,013 

1,354,136 

North America

2,487,275 

4,082,231 

8,216,889 

Other

115,101 

116,489 

254,945 


3,265,046 

4,757,733 

9,825,970 

Total assets




Europe

5,381,474 

9,996,652 

7,082,194 

North America

3,847,794 

8,164,830 

7,320,819 

Other

109,507 

129,157 

117,932 


9,338,775 

18,290,639 

14,520,945 

Total liabilities




Europe

(453,687)

(474,645)

(526,660)

North America

(2,944,641)

(4,353,239)

(4,126,637)

Other

(87,977)

(96,847)

(96,272)


(3,486,305)

(4,924,731)

(4,749,569)

Net assets




Europe

4,927,787 

9,522,007 

6,555,534 

North America

903,153 

3,811,591 

3,194,182 

Other

21,530 

32,310 

21,660 


5,852,470 

13,365,908 

9,771,376 


3. Impairment of seed investments

Due to the deterioration of market conditions, the Group has recognised an impairment charge of £683,769 against the fair value of its seed investments in new funds in line with IAS 39.


4. Earnings per share

The calculation of earnings per share is based on the profit for the period of £1,840,256 (31st May 2008 - £7,135,716; 30th November 2007 - £3,560,583) divided by the weighted average of ordinary shares in issue for the six months ended 30th November 2008 of 23,659,415 (31st May 2008 - 24,338,540; 30th November 2007 - 24,553,437).


As set out in note 5 the Employee Benefit Trust held 1,617,650 ordinary shares in the company as at 30th November 2008. The Trustees of the Trust have waived all rights to dividends associated with these shares. In accordance with IAS33 'Earnings per share', the ordinary shares held by the Employee Benefit Trust have been excluded from the calculation of the weighted average of ordinary shares in issue.


The calculation of diluted earnings per share is based on the profit for the period of £1,840,256 (31st May 2008 - £7,135,716; 30th November 2007 - £3,560,583) divided by the diluted weighted average of ordinary shares in issue for the six months ended 30th November 2008 of 25,948,467 (31st May 2008 - 27,404,870; 30th November 2007 - 27,853,801).


5. Investment in own shares

Investment in own shares relates to City of London Investment Group Plc shares held by an Employee Benefit Trust on behalf of City of London Investment Group Plc.


At 30th November 2008 the Trust held 1,617,650 ordinary 1p shares (31st May 2008 - 2,013,085; 30th November 2007 - 1,968,085), of which 1,302,625 ordinary 1p shares (31st May 2008 - 1,458,310; 30th November 2007 - 1,857,310) were subject to options in issue.


6. Dividends

The final dividend of 13.5p per share in respect of the year ended 31st May 2008 was paid on 21st November 2008.


The interim dividend of 5p per share (2008 - 6p) will be paid on 2nd March to members registered at the close of business on 13th February 2009.


7. General

The interim financial statements for the six months to 30th November 2008 were approved by the Board on 21st January 2009. These financial statements are unaudited, but they have been reviewed by the auditors, having regard to the bulletin 'Review of Interim Financial Information' issued by the Auditing Practices Board.


Copies of this statement are available on our website, www.citlon.co.uk






This information is provided by RNS
The company news service from the London Stock Exchange
 
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