City of London Investment Group Plc (LON:CLIG) today provided a trading update while Zeus Capital said:
What’s new
Today’s pre-close statement from City of London Investment Group (CLIG) reveals:
* Total funds under management (FuM) 31 Dec 2016 were $4.1 bn (£3.3 bn);
2.5% rise since 30 June 2016 when FuM was $4.0 bn (£3.0 bn).
* Unaudited PBT for 1H17e of c. £5.8m, (up 61% from 1H16: £3.6m), with a monthly “run-rate” for operating profit, before profit-share of £1.4m per month.
CLIG’s investment performance has been “challenging”: country allocation “weak” and NAV performances of portfolio Closed End Funds (CEF) has been “poor”. Discounts remain wide generally: size-weighted average discount (SWAD) is c.13%-14%, suggesting significant strategy value for investors in CEF. Active pipeline of >$400m, is spread across Emerging and Developed Markets, Global Tactical Asset Allocation, Tactical Income, and Frontier CEF strategies.
Management has updated its “template”, which shows:
* 1Q17 & 2Q17 exceeded management’s previous expectations.
* Management expectations for 2H17 have been maintained.
* Dividend cover is increasing (assuming the DPS is unchanged).
Zeus view
We take this opportunity to adjust our forecasts to reflect new management guidance. Assuming new guidance and an exchange rate of £1=$1.25, we raise our FY17e adj PBT forecast by 2.8% to £11.5m. Our unchanged DPS forecast of 25.0p is covered 1.36x by our new FY(Jun)17ec adj EPS of 34.0p (up 2.8%). Lower assumed growth in FUM in FY18e and higher operating cost growth, means that we now reduce our FY18e adj EPS by 6.9% to 38.0p.
Prospects of 12% growth in adj EPS should encourage the Board to nudge the FY17e final dividend up by 1.0p to 17.0p and increase the FY18e interim DPS to 9.0p. The formal dividend policy is to have cover of 1.2x over a rolling 5 yr period. We expect CLIG’s 1H17 DPS to remain unchanged at 8.0p (1H16: 8.0p).
Valuation
With City of London Investment Group Plc shares at 350p (3 month high/low: 381p; 333p), its historical dividend yield is 6.9%. Its 2017 dividend yield on our forecasts is 7.1%, which is 92% more than the FT All Share yield of 3.7%. A more reasonable 50% premium would set a target dividend yield of 5.55% dividend yield, implying a 455p CLIG target price.
