Performance pays dividends

City of London has announced its final results for FY’23. The headline figures were in line with those announced in the July trading statement. Weaker markets weighed on profitability, offset by outperformance across the majority of assets. A stronger US dollar also generally supported fee income. The lower average FUM led to a 6% reduction in net fee income to £54.6m. Costs were adversely affected by exchange rates and some adjustments for staff changes. This led to underlying EPS declining from 44.2p to 36.5p, a 17% reduction. The final dividend, as previously indicated, is 22p, bringing the full-year figure to 33p.

• Funds: City of London experienced net outflows over the year, although CLIM’s Opportunistic Value and KIM institutional strategies saw net inflows. Performance was generally good, with Emerging Markets, Opportunistic Value and several KIM strategies outperforming, despite widening discounts in closed-end funds.
• Estimates: We made mostly minor adjustments to our estimates. Exchange rate movements led to a 6% increase in our 2024 and 2025 EPS estimates, to 36.1p and 38.1p respectively. With the change in reporting currency to dollars, we also introduce dollar forecasts of 44.4¢ for 2024 and 46.9¢ in 2025.
• Valuation: After the recent performance, the 2024E P/E of 13.2x is roughly in line with that of the peer group. The 2024E dividend yield of 8.7% 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 38% 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. Now that the Karpus transaction has settled down, the prospects for future dividend increases may be more dependent on markets and the ability to attract new business.