City of London Investment Group “Q1 results are consistent with our forecast” says Zeus Capital

City of London Investment Group plc (LON:CLIG) has released an impressive trading update to 30 September 2020, which includes comment on City of London Investment Management 1Q post tax profits, client assets (FUM & AUM) at period end and CLIG’s acquisition of KMI that completed last Thursday.

  • 8% rise in CLIM’s FUM to US$5,935m (30/6/20: US$5,503m) which is a 4.5% rise in Sterling value of FUM from £4.4bn to £4.6bn;
  • Outperformance of all CLIM investment strategies, except Frontier (< 3% of FUM) where discounts widened;
  • Net outflows of US$83m were 1.5% of opening CLIM FUM: US$107m flowing out of Frontier and US$39m net inflows to Emerging Market strategies;
  • 17% rise in CLIM’s 1Q post-tax profit before exceptionals to £2.8m (2019: £2.4m) with £1.8m exceptional costs of KMI acquisition PAT are circa £1.0m;
  • Acquisition of KMI with AUM of US$3.6bn completed on 1 October 2020, with 98% of client assets transferred on acquisition;
  • Group manages US$ 9.5bn of client assets, as of 1 October 2020;

CLIG’s 20p final DPS, is subject to approval at AGM on 19 October.

Zeus view: CLIG’s 1Q results are consistent with our forecasts for 2021E and 2022E (see pages 2 to 5), which include the KMI acquisition from 1 October 2020. We draw attention to the following points:

  • Post KMI, only 44% of Group client assets are invested in emerging markets;
  • KMI AuM of US$3.6bn (£2.8bn using $1.29: £1 exchange rate) is ahead of our previous estimate of US$3.4bn (£2.7bn using a $1.25: £1 exchange rate);
  • Sterling has strengthened from US$1.25 = £1 to a high of US$1.33 and is now US$1.29.

In future we expect Client assets will be less sensitive to equity market movements.

In FY22 with a full year from KMI, we see CLIG delivering 47.1p adj EPS and the Group paying a 32p dividend. Our forecasts continue to show CLIG’s net cash of £20m in June 2021 and £30m in June 2022.

Valuation: On our FY21 forecasts, at 435p City of London Investment Group shares trade on only 9.6x current year EPS and offer investors a 6.9% dividend yield. With a full year contribution from KMI in FY22 the PER falls to 9.2x and dividend yield rises to 7.4%.  

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