Solid results in volatile markets

City of London has announced its interim results for 1H’23. The headline figures were in line with those from the January trading statement. As previously indicated, weak markets meant that results were down on the year before. Gross revenue of £28.7m was 9% down, from £31.4m in 1H’22. Underlying earnings after tax were £8.99m, a decline of 25% from the previous year (note that these no longer need to be adjusted for part-years of Karpus). Underlying EPS of 18.4p represented a decline by the same percentage from 1H’22. FUM saw net inflows from a range of areas, including the KIM Institutional strategy showing a return to growth.

• Operations: While exchange rate movements were the largest factor in expense growth, City of London is also investing in growing KIM’s new business capacity. Lead times mean that the benefit is more likely to be seen in FY’24 than FY’23.
• Estimates: Although markets have given back the early gains in this quarter, there is a slight boost to our estimates. We have increased our underlying 2023E EPS by 2%, to 34.4p, while our underlying 2024E EPS has increased by 0.5%, to 35.7p. We have also introduced a 2025E EPS of 37.8p.
• Valuation: After the recent performance, the 2024E P/E of 15.6x is roughly in line with the peer group. The 2024E 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 39% 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.