Strong markets and merger support dividend hike

City of London has announced a trading statement covering its second-quarter FUM and first-half financial performance. These are excellent, even allowing for the boost that the Karpus transaction has given. The highlight for many investors will be the interim dividend increase to 11p (from 10p in 2020), with strong profit progress and an increased cash balance of £17.5m underpinning future dividend prospects. Estimated pre-tax and pre-amortisation profit for the half-year is estimated at £9.9m, a 60% increase over the 2020 figure. Exceptional transaction costs of £1.7m give an underlying figure of £11.6m.

• FUM: In 2Q, FUM rose from $9.52bn to £10.98bn, a 15% increase. Strong markets were the main driver, with a significant boost from good outperformance in the three main CLIM strategies. This has some offset from fund flows, as investors rebalanced.
• Operations: The CLIM revenue run rate continued its recent trend and ticked down to 73bps. Nevertheless, the run rate for operating profit before profit share is approximately £3.4m per month, double the rate before the merger. This is despite adverse exchange-rate movements.
• Valuation: Despite the recent good performance, the 2021E P/E of 10.3x remains at a discount to the peer group. The 2021E yield of 6.9% 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 47% 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 shown robust performance in challenging market conditions, City of London is now reaping the benefits in a more supportive environment. The valuation remains reasonable. After a special dividend in FY’19, a dividend increase in FY’20 and with the EPS boost from Karpus in 2021, the prospects for future dividend increases look very good.