Solid profits in tough markets

In this note, we review City of London’s annual results for 2022 and its trading update for 22’Q1. The headline full-year figures were announced in July’s trading statement, and allowance needs to be made for the inclusion of Karpus for the full year. The weakness of markets in the second half did affect results, with net fee income up 11%, to £58.2m. City of London’s underlying profit before tax rose 4%, to £27.9m, while underlying EPS (on City of London’s basis) declined 9%, to 44.2p. Cash conversion, as usual, remained excellent, at 108% of underlying profit, while the cash balance remained very strong, at £22.7m, as well as £7.4m of seed investments.

• Q1: Weak stock markets continued to dominate movements in FUM. With both emerging and developed markets declining significantly, FUM reduced by 8%, to $8.51bn. For the monthly run-rate operating profit, exchange rate movements offset some of this, and the decline was from £2.8m to £2.7m.
• Estimates: We have made some minor adjustments to our expense assumptions, but also aligned our underlying estimate more closely with City of London’s. However, the main changes come from the decline in FUM, with some currency offset.
• Valuation: Despite the recent good performance, the 2023E P/E of 14.6x 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 the EPS boost from the Karpus transaction, the prospects for future dividend increases may be more market-dependent.