Confirming an excellent first half

City of London has announced its interim results for 1H’22. Having announced a special dividend of 13.5p in its January trading statement, the main interest was in the details. Breaking down net inflows into gross inflow and outflows showed that 2Q was a distinct improvement over 1Q. City of London believes that, once the pandemic restrictions relax, a return to in-person meetings will improve its ability to market its products. Financially, we note that the cash conversion of profits remains excellent, at 87% of underlying earnings, underpinning its strong dividend- paying capability.

• Operations: The IT integration after the Karpus transaction is continuing and is expected to be finished before the end of the financial year. After a decline in the importance of the Middle East in equity market indices, City of London is closing its Dubai office – with some small cost savings.
• Estimates: We have increased our estimates of the net inflows into the new strategies and outflows from existing strategies, pushing down fee margins. Our 2022E underlying EPS has fallen 3%, to 47.3p, while our 2023E underlying EPS is down 4%, to 50.0p. Our new 2024E EPS is 53.1p, with an estimated dividend of 39p.
• Valuation: Despite the recent good performance, the 2023E P/E of 12.7x remains at a discount to the peer group. The 2023E yield of 6.8% 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 43% 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 maintained good investment performance and operational control, City of London is well-placed to grow organically. We believe the valuation remains reasonable. After special dividends in FY’19 and FY’22, dividend increases in FY’20 and FY’21, and with the EPS boost from Karpus, the prospects for future dividend increases look very good.