Solid results, with surprise dividend increase

City of London has announced its full-year results for FY’20. As previously indicated, over a volatile year, FUM grew to $5.51bn. This led to a 4% increase in fee income to £33.3m. With cost control excellent, as usual, this led to a 9% increase in operating profits to £11.6m. Earnings were impacted by exceptional costs for the Karpus transaction and losses on the seed investments in the new REIT strategies, and fell 19% to £7.37m. The final dividend was increased from 18p to 20p, giving 30p for the full year. This leaves cover ahead of the target cover over a rolling five-year period of 1.2x.

• Karpus expenses: There will be £3m of exceptional expenses for the Karpus transaction, plus £1m of capitalised share issuance costs. Of these, £1.25m of the expenses were charged in the 2020 accounts, while the remainder will be incurred in FY’21.
• Board: City of London’s founder, Barry Olliff, will stay on the board for another year, while the senior independent director, Susannah Nicklin, will not seek re-election at the AGM. City of London acknowledges that, in the short term, there will be a minority of independent directors, but it will address this soon.
• Valuation: The 2021E P/E of 9.6x is at a discount to the peer group. The underlying 2021E yield of 8.2% 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. After a special dividend in FY’19, FY’20 saw another dividend increase. With the expected EPS boost from Karpus in 2021, the prospects for future dividend increases look very good.