City of London Investment Group plc (LON:CLIG) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.
Q1: City of London Investment Group published an in interim trading update for the quarter ended 31st December 2021. What were the key points in your opinion?
A1: The quarterly update reveals solid investment performance in difficult markets, encouraging net inflows and a strong balance sheet.
So, in terms of the Funds under Management, they operate across the world, US, right across Asia, the Pacific so they measure their assets in US dollars. In terms of US dollars, the assets were $11.1 billion, in pound sterling that’s £8.2 billion and in the second quarter of their financial year, there were net inflows of $59 million.
As I mentioned, there was a solid investment performance across the investment strategies so with a little bit of net inflows, the assets were pretty stable in that quarter. They’ve maintained an active pipeline across its major products in particular, the international developed markets products, the net of third party commissions continues to accrue at around about £5 million a month, which is in line with our forecast. Overheads are £1.6 million a month, which also in line with our forecast and sterling has been pretty much stable at 1.35, which is where we are quite happy to leave the forecast for the year.
The net cash of £24.5 million pounds at the end of December 2021 is extremely full, they don’t need anything like that amount so they have declared, an interim dividend of 11p per share, which is the same as last year, and also a 13.5p special dividend.
They are going to report their full interims on the 18th of February and their dividends will go ex-div on the 25th of February.
Q2: How does this trading forecast change your view on CLIG as an investment?
A2: Well, three things. One, our forecasts remain unchanged apart from the special dividend and consequently the cash so we are keeping our forecast revenue at £60 million, I mentioned it was occurring at £5 million a month and keeping our profit forecasts unchanged. I mentioned that the administration costs were stable and we’ve changed our dividend to include the 13.5p special dividend so that final dividend is typically twice the interim so 33p and 13.5p, you can see an attractive dividend for the year. We expect the special dividend to cost just under £7 million so have reduced the net cash accordingly.
The second point is looking at the Funds under Management and there are now signs of growth. First quarter had net outflows, mainly due to rebalancing of portfolios in the emerging markets, institutional funds but now we’ve got net inflows, particularly in the international product. That international product has got a strong track record and marketing efforts are going to be focused on that.
Third point is the shape of the business. It is becoming more equally balanced so a year ago, the emerging markets share of the assets was 47%, in September, that was 45%, it’s 43% now of the total assets. The international markets share were 15%, that’s increased to 17% in September and 19% now and Karpus, the US wealth management division which they acquired 18 months ago, the share was 34% last year, 36% in September and 35% now.
So, I think that essentially the business is proceeding the way that we would like, although obviously we would like to see more growth when it appears.
Q3: So how do you value City of London Investment Group shares?
A3: It pays a very attractive dividend and that’s a very good starting point. Businesses which have no debt, surplus cash and pay dividends tend to have some good fundamentals and I think if you look at the performance of CLIG over the last 5/10/15/20 years, you can see that dividends have paid a major element in terms of the total return that shareholders have managed to get. Over the past five years, CLIG has delivered a total annual return of around about 15/16% per annum with dividends providing half that total return so around about 8%, so 6% normally with the extra coming through from specials. Here, again, you’ve got a situation where they continue to pay an attractive dividend, supplemented by specials. and the compounding effect of that over time is extremely attractive.
In terms of where we would like to value the business, we would like to see the value of growth, that growth has to come through. To be fair, the international markets business has been organically built, it’s developed the track record over the last five and six years and as the track record is lengthened, the inflows have continued to fly in.
So, how big could that get? Well, it could double/triple in my view and what is required is a concerted effort to market that product across a wider space. I suppose the Karpus wealth management division, which is now just over a third of their business, is the area which we would love to see growth coming through. They’ve got a good track record but marketing to wealth management clients across the US is a difficult thing to do.
So we’re going to be watching for signs of growth but at the moment it’s on a valuation which offers attractions to value investors and I think that’s what you should see it in the context of. It’s a very reliable business, well controlled and delivering an attractive dividend. So, at £5 a share, it’s trading on an undemanding multiple of earnings of just over 10 times and it’s delivering a 9% dividend yield, including the special so I don’t think you could get much better from that. Even excluding the special dividend, you’re getting an over 6% dividend yield which is also attractive.