Investment management company Charles Stanley (CAY), reports core profits before tax up 6% at £11.6m for the year ended 31 March 2019, but the market is not impressed, pushing the shares down 4% to 303p.

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SIGNIFICANT SAVINGS

The company is restructuring in an attempt to simplify and standardise business processes. It is expected to cost £9.5m over the next 2-3 years, with annualised savings of over £4.5m from fiscal year 2022 onwards.

In the medium term Charles Stanley has a pre-tax operating margin target of 15% compared with today's 9.2%. The company has a 3-pronged strategy to reach its target; scaling up the discretionary fund management services business; improving the margin by changing the mix of business; increasing cost efficiencies.

Discretionary funds under management are now 61% of the business, leaving plenty of room to grow, but the market backdrop is a potential headwind short term. Indeed, the company points out that during the second half of the year clients withdrew funds in response to difficult market conditions.

SIGNS OF IMPROVEMENT

Changing the mix of the business in an attempt to improve profitability is seeing some progress, with a 6.5% increase in the higher margin discretionary funds unit to £13.1bn.

The business performance is very dependent on the level of funds under management and administration (FuMA) and while these increased by 1.3% to £24.1bn, growth lagged behind the 3.9% gain of the MSCI private investor balanced index.

Meanwhile the lower margin Advisory business, which includes managed funds and dealing sees a 12.5% decline in funds under management to £2.8bn.

Execution only services see a £0.5bn outflow in the traditional voice-brokered service, but there is a 17.4% uplift in on-line assets under management to £2.7bn. Charles Stanley expects the polarisation into discretionary and on-line execution only services to continue.

Pleasingly for income seekers, the dividend is increased by 9.4% to 8.75p, giving a yield of 2.9% at current price levels.

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Issue Date: 31 May 2019