The share price of ethical fund manager Australian Ethical Investment Limited (ASX: AEF) will be on watch today after the company provided an earnings guidance and business update.
After a stellar run over the past 2-years, the Australian Ethical share price is down 4.25% today to $13.96.
AEF share price
First-half earnings expected to rise 8%
For the six months to 31 December 2021, the underlying profit after tax (UPAT) is expected to be between $5.0-$5.5 million.
At the midpoint of this guidance, this represents a UPAT increase of 8% over the same period in 2020 where the company recorded a profit of $4.9 million.
The result does not include any performance fees from the Emerging Companies or High Conviction Fund, which will only crystalise on 30 June 2022.
Nor does it account for any significant market movements.
Inflows support FUM rise
Fund under management (FUM) for the first four months of FY22 (July – October) increased 9% to $6.64 billion.
The 9% increase was largely driven by net inflows of $0.40 billion and positive market movement of $0.17 billion.
Short-term hit for long-term gain
For a business trading on a price-to-earnings ratio of 150, 9% growth doesn’t look too impressive.
But Australian Ethical is sacrificing short-term profits for long-term success.
The company is reinvesting in its distribution, investment and customer service teams to support growth.
Additionally, product development such as exchange-traded funds or new managed fund options has been flagged over the near term.
“Australian Ethical will continue to invest in its high growth strategy given the positive momentum we are experiencing and the scale of the opportunity ahead. As such, costs in the second half will grow compared to first half, as we continue to implement our strategic roadmap”
Is now the time to buy Australian Ethical shares?
Despite liking the overall growth strategy, I struggle to buy companies on such high multiples.
However, I said the exact same thing, at $6, $9 and $12 per share as the share price climbed over the past 12 months.
The secret sauce for Australian Ethical is the long runway of growth ahead. It will keep earnings superannuation contributions, managed fund inflows and new customers for years or even decades to come.
Subsequently, the market places a very high premium on the business.
However, like all fund managers, the business is susceptible to poor performance. If its underlying funds have a poor year, expect the share price to fall as well.
Additionally, given the business is leveraged to its underlying investments and therefore markets, any sell-off will lower FUM and therefore revenue.
For now, the business remains on my watchlist until I can get more comfortable with the valuation.
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