Analyst Andrew Watson at broking house N+1 Singer is confident enough and predicts that Charlemagne will lift pre-tax profit by a further 19 per cent to $11.3m in the 12 months to end December 2014, having reported a near 90 per cent rise to $9.5m last year. Admittedly, the uncertain macro backdrop means growth assumptions have been reined in somewhat, but given a change in the business mix to higher-margin mandates then earnings will still rise even if annual revenues flatline at $41.6m, as Mr Watson anticipates.
On this basis, expect EPS of 1.7¢, or 1.03p, around 20 per cent higher than in 2013. The brokerage also forecasts another steep rise in the dividend to around 1.7¢ a share, up from 1.5¢ in 2013, reflecting the board's policy of paying out all net earnings to shareholders. This means that the shares are currently offering an attractive prospective yield of 5.6 per cent. The payout could conceivably be more if emerging markets stabilise and EPS beats estimates.
It's also worth considering that Charlemagne's net funds ended last year at $25.4m, or £15.4m. This equates to 5.3p a share. Strip this sum out from the current share price of 18p, and the cash-adjusted PE ratio is only 12.5 for 2014, a rating that seems harsh. A share buy-back programme is also supportive of the investment case given the company can shrink its issued share capital by recycling low-yielding cash by repurchasing its shares to boost EPS. Also, net of cash the company's equity is only being valued at 1.8 per cent of assets under management (AUM), a modest rating relative to peers.
True, Charlemagne's AUM did fall in the first quarter, from $2.73bn to $2.58bn. However, two-thirds of the decline was attributed to the redemption of a white-label institutional mandate and the rebalancing of asset allocation by a single client. These outflows are less important as these are low-margin products where Charlemagne has no control of branding or marketing. Of far more importance was the 9 per cent ($51m) inflow of new funds into Charlemagne's top-performing Magna funds.
Last year, the Magna funds attracted total net flows of $193m and this segment is where most of the growth is likely to generated in the future. Both Charlemagne's GEM dividends and Frontier strategies enjoyed notable inflows, a trend that is set to continue according to analysts. In fact, eight of the nine Magana funds posted above median performance in the first quarter, and no fewer than six were in the first quartile. It was no fluke as Charlemagne's emerging markets equity income and growth strategies have achieved top decile performance over one and three years in its Morningstar peer group, and eight out of nine of the Magna sub funds performed better than their respective median fund last year.
Discerning investors reward quality
It's fair to assume that last year's investment theme of stock picking in emerging markets is set to continue in the absence of a rally in risk assets. That seems a reasonable assumption to make given the unstable geopolitical back drop in Ukraine and Russia and concerns that a tapering of the US central bank's bond purchase programmes will lead to withdrawals from fixed income markets as hot money flows exits.
That said, investors are far more discerning in distinguishing between good and bad companies, and higher-quality businesses - those that create consistent value for shareholders - continue to command a premium valuation. That should be good for Charlemagne's investment strategies and in attracting investors given its track record.
In the circumstances, I have little reason to change my positive view on the shares which have risen by 11 per cent since I included them in my 2014 Bargain Shares Portfolio. On a bid-offer spread of 17.75p to 18.25p, Charlemagne's shares rate a decent income buy where recovery in emerging markets is in effect in the price for free.
Please note that I am still working my way through a list of companies on my watchlist. I will try and clear the back log this week. The companies include: Inland (INL), API (API), Oakley Capital (OCL), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis (BVS).
■ Finally as a special offer to IC readers purchasing my book Stock Picking for Profit before Friday 16 May, and subject to limited availability, online orders placed with YPD Books and quoting offer code 'ICOFFER' will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge. I have published an article outlining the content: 'Secrets to successful stock picking'
