Robust profits in tough markets

City of London has announced its trading update for the final quarter of FY’22. It has been another tough quarter for fund managers, with global markets suffering significant setbacks. CLIM’s two main benchmarks, the MSCI Emerging Markets Net TR Index and the MSCI All Country World Index ex US, declined 11% and 14%, respectively. Against that, it is no surprise that City of London’s total FUM declined from $10.26bn to $9.22bn. This was helped by another quarter of net inflows, with the International strategy adding $183m of net new assets. Against that was underperformance in most of CLIM’s strategies.

• Operations: City of London provided some estimated full-year figures for profitability in 2022: profit before amortisation and tax of £27.2m (£25.5m in 2021), and EPS better reflecting the full year of Karpus, with basic EPS of 37.1p (39.4p in 2021) and fully diluted EPS of 36.6p (38.8p in 2021).
• Estimates: The weak markets, offset by exchange rate movements, have led to downgrades to our earnings estimates. Our 2023 and 2024 underlying EPS forecasts are both reduced by 13%, from 46.9p to 40.7p and from 49.9p to 43.5p, respectively.
• Valuation: Despite the recent good performance, the 2023E P/E of 12.6x remains at a discount to the peer group. The 2023E dividend yield of 8.9% 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 40% 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 long-term investment performance and operational control, City of London is well-placed to grow organically. We believe the valuation remains reasonable. After recent special dividends, dividend increases, and with the EPS boost from Karpus complete, the prospects for future dividends increases may be more market-dependent.