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%.