Results full of cash

City of London has issued its annual report for FY’21. While the headline figures remain impressive after the Karpus transaction last October, it is some of the underlying figures that are the news here. The most eye-catching one for most investors will be the rise in the cash balance, at £25.5m, 75% more than the £14.6m from a year ago. Both the businesses are strongly cash-generative and, unless markets have a strong correction, this will increase further over the next year. At the very least, this will provide a robust balance sheet in the event of any market downturns, but may also provide options for further cash returns.

• ESG: With ESG rising in investors’ minds, we take a look at City of London’s improved disclosure in this area. It has long had a strong governance approach in its investment process, but it is broadening out its perspective. Corporately, there is a commitment to review the board composition over the next year.
• Estimates: The main changes to our estimates reflect City of London’s ongoing excellent cost control, with small reductions to our assumed future expenses. The net result is small upgrades to our forecasts, with both our 2022E and 2023E EPS increasing by 1%.
• Valuation: Despite the recent good performance, the 2022E P/E of 12.1x remains at a discount to the peer group. The 2022E yield of 6.9% 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, dividend increases in FY’20 and FY’21, and with the EPS boost from Karpus, the prospects for future dividend increases look very good.