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City of London has announced its final trading update for FY’21. The year has shown dramatic progress. The merger with Karpus has been complemented by strong markets, boosting FUM substantially. FUM finished the year at $11.45bn, a 26% increase from the $5.50bn CLIM had a year ago plus $3.58bn from Karpus when the merger took place in October. The benefits of strong markets have been offset by steady outflows from rebalancing and redemptions but boosted by outperformance across the strategies. The net result is the FUM increase is somewhat behind market movements.

  • Operations: For the full year, estimated profit after tax will be £17.0m, an increase of 124% on the previous year. We estimate underlying EPS to increase by 29%. As expected, an increased final dividend of 22p has been announced, making the full-year amount of 33p a 10% increase over FY’20.
  • Estimates: Although the results are comfortably ahead of our expectations, only the increase in FUM improves future earnings. The net result is small upgrades to our forecasts, with both our 2022E and 2023E EPS increasing by 3%.
  • Valuation: Despite the recent good performance, the 2022E P/E of 12.5x remains at a discount to the peer group. The 2022E yield of 6.7% 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 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, dividend increases in FY’20 and FY’21 and with the EPS boost from Karpus, the prospects for future dividend increases look very good.
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