Karpus benefit coming through strongly

City of London has announced its interim results for FY’21. The merger with Karpus took place in the middle of the reporting period, which, together with strong market performance, has had a strong beneficial effect. Gross revenue grew to £23.7m, an increase of 37% over the figure from the same period a year ago. Statutory profit also showed a strong increase, even after the exceptional transaction costs and introduction of amortisation. On an underlying basis, earnings grew 81% to £8.82m, while underlying EPS was up 23%, from 19.4p to 23.8p. An interim dividend increase to 11p had been announced previously.

• FUM: City of London provided some further details on fund flows and performance. Both the retail and institutional assets within Karpus saw net outflows, reflecting rebalancing more than transaction disruption. Five of its six strategies outperformed in the last quarter.
• Amortisation and estimates: The transaction introduces a large amortisation figure: £1.1m for the last quarter. We have moved our forecasts to an underlying basis, with 2021E EPS now 47.1p, an increase of 24% over 2020 EPS. We have also introduced 2023 estimates.
• Valuation: Despite the recent good performance, the 2022E P/E of 11.9x remains at a discount to the peer group. The 2022E yield of 7.2% is attractive, in our view, and should, at the very least, provide support for the shares in the current markets.
• Risks: Although City of London has reduced its relative emerging markets exposure, it is still 47% of assets. It has proved to be more robust than some other fund managers, aided by its good performance and strong client servicing. Market volatility remains a risk, 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, a dividend increase in FY’20 and with the EPS boost from Karpus in 2021, the prospects for future dividend increases look very good.