Swings and roundabouts

City of London has announced a trading statement for 1H’23 and, implicitly, 2Q’23. After 1Q’23 being weak for markets, they bounced back in 2Q, recovering the losses – and a bit more. Fund performance was also solid. After a good 1Q for inflows, the market gains were offset by some outflows across the strategies. The net result is that FUM increased by 7% over the quarter, from $8.51bn to $9.15bn. This was a marginal decline, over the half year, on the $9.22bn as of 30 June 2022. An unchanged interim dividend of 11p was also announced. The shares go ex-dividend on 2 March, and the dividend will be paid on 31 March 2022.

• Operations: While the market recovery boosted revenues in dollar terms, a weak exchange rate offset much of the benefits. The run rate profit before tax and amortisation is the same as it was three months ago, at £2.7m. City of London’s estimated profit before tax and amortisation for 1H’23 is £11.9m.
• Estimates: The increase in FUM and the depreciation of the dollar relative to the pound almost exactly cancel each other out in our estimates. Our underlying 2023E EPS is unchanged, at 33.8p, while our 2024E EPS has decreased by 0.2%, to 35.5p.
• Valuation: After the recent performance, the 2023E P/E of 16.3x is roughly in line with the peer group. The 2023E dividend yield of 8.0% 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.