Zeus Capital Research Director Robin Savage caught up with DirectorsTalk for an exclusive interview to discuss City of London Investment Group PLC (LON:CLIG)
Q1: Robin, yesterday City of London Investment Group released its interim results for the 6 months to 31st December, the interims reveal a 68% increase in EPS to 17.5p which is slightly higher than the 61% increase in PBT revealed by the pre-close update on 17th January. Do these results compare to expectations set out at the pre-close statement on the 17th January?
A1: Well these results are slightly ahead of expectation set on 17th January, as you mentioned the first half adjusted EPS of 17.5p is just ahead of the EPS implied by the pre-close statement, actually 1.7% higher. Secondly, over the past month, emerging market indices are up over 4% and that is encouraging and thirdly, the full interim results published yesterday provides quantitative data which supports our view that CLIG has an impressive investment track record over the past decade and is well positioned for the second half. So, as the MSCI emerging market index is 6% above our forecast to June this year, I’m confident that City of London Investment Group PLC can beat our full year forecast.
Q2: So, the first half of CLIG’s financial year was good, what is the current trading like and what are the prospects for the second half and beyond?
A2: The second half, which began on 1st January, has started very well. The index is up, now 8.9% in US dollar terms and 8% in sterling and this improvement provides a following wind for City of London Investment Group. The management has provided clear guidance for all investors in the form of a template, the template and the assumptions underlying the template are set out in the statement and on the website and management expects the second half to generate slightly more profit than the first half. We should always remember that markets go down as well as up and sterling can strengthen as well as weaken so I’m going to leave my forecast unchanged and with the pound trading at $1.25 the second half should be good even if the pound ends up strengthening. So, I feel confident that City of London Investment Group’s full year results to 30th June will be impressive and there will be scope for growth in 2018.
Q3: On valuation, CLIG shares are up 28% over the past year which is 36.8% with dividends reinvested, over the next year then what total return do you expect from CLIG shares?
A3: Well, the shareholders in CLIG should expect an attractive dividend yield, prospects of dividend growth and also capital gains so the capital gains from an improvement in the ratings. So, take those each in turn:
Number one, for the past 6 years CLIG has paid a 24p dividend in total each year and this equates to a 6.3% dividend yield. CLIG has a strong balance sheet with no debt and net cash of over £10 million which is 39p a share so we can all be confident in the ability to pay 24p in dividend for the full year.
Second point, the potential for increased dividend per share, we expect the adjusted EPS growth this year to be 43%, to increase from just under 24p last year to 34p this year. So, the dividend should be well covered this year, and whilst the CLIG Board has left the interim DPS unchanged at 8p a share, I expect it to increase the final dividend, perhaps, I forecast it to increase by 1p which is 6.3% to 17p. So, this year I forecast the dividend increase to be 4.2% to 25p a share which is just a little bit of a help.
Thirdly, there is scope for an improvement in the rating, at the moment City of London Investment Group PLC is trading with a dividend yield which is 70% premium to the equity market as a whole. I think that the premium ought to be something like 50%, in my view a sensible yield for a business like City of London Investment Group, which is sensitive to financial markets and sensitivity to currency, is around about 50% premium which is 5.55% so, on a dividend of 5.55% City of London Investment Group would be trading on £4.55 which is 20% of our current share price.
So, if you were buying today at £3.80 you should expect 1, historical dividend of 6.3%, 2, you should expect a bit of dividend growth so that might add another 4% and then on top of that, you should expect a potential for an increase in the market rating which could well be as much as a 20% further increase. So, I think that so long as the markets continue to be kind to City London Investment Group, I think that the market is set fair for them.