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City of London Investment Group “Business As Usual”

What’s new: On 13 July, at its EGM, shareholders approved City of London Investment Group plc (LON:CLIG) all share acquisition of Karpus Management Inc, “KMI”. On 14 July CLIG’s update confirmed  it is trading “Business As Usual”, through the global pandemic. In summary:

  • KMI acquisition is scheduled to complete on 1 October 2020:

–       Consideration of up to 24.1m new CLIG shares (subject to adjustments reflecting client acceptances), increasing CLIG’s issued shares by 91%;

–       KMI increases “diversification“, adding exposure to US balanced portfolios and reducing Emerging Market exposure from c 70% to c 43%; 

–       KMI‘s c. 85 bps revenue margin lifts group from c. 75 bps to c. 79 bps;

–       Good fit with CLIG’s investment and management philosophy;

–       KMI adds c. US$3.4bn to Group Funds of Assets under Management.

  • Trading update ahead of 14 September, CLIG full year results revealed:

–       US$338m of net inflows (6.3% of 1 July 2019 FUM) with US$597m flowing into Opportunistic Value and Developed strategies (now US$1.5bn FUM)

–       Emerging Market and Developed strategies outperformed (92% of FUM);

–       25% rise in CLIG’s Funds under Management in 4Q to US$5.5bn.

  • The Board intends to maintain the final dividend at least at the same level as last year (2019 final DPS: 18p)

Zeus forecasts: While CLIG’s 4Q net inflows and financial markets were stronger than we expected, we leave our FY20E forecasts broadly unchanged; our new FY21E and FY22E forecasts prudently assume:

  • KMI acquisition enhances FY21E adj EPS by c. 4% from 43.4p to 45.1p;
  • US$1.25 = £1; no change in financial markets; no net inflows.

In FY22 with a full year from KMI, we see CLIG delivering 47.1p adj EPS and the Group paying a 32p dividend (i.e. 6.9% CAGR growth over the next 2 years).

Our forecasts show CLIG’s net cash of £10m in June 2020 and £20m in June 2021.

Valuation: On our new FY21 forecasts, at 385p City of London Investment Group shares trade on only 8.5x current year EPS and offer investors a 7.8% dividend yield. With a full year contribution from KMI the PER falls to 8.2x and dividend yield rises to 8.3%. 

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