Acquisition Of Altius Asset Management Will Strengthen Capabilities And Expand Customer Base

Key Takeaways

• Expansion through acquisitions and new product offerings aims to enhance revenue by diversifying income and entering new customer segments.
  
• Strong ethical brand and operational efficiencies are set to boost profitability, customer retention, and future revenue growth.
  
• Challenges in growth realization and strategic investments, combined with fee margin pressures, could impact revenue growth, net profit margins, and long-term earnings.

Catalysts

Australian Ethical Investment Ltd is a publicly owned investment manager.

• Australian Ethical's strategic acquisition of Altius Asset Management, adding approximately $2 billion of fixed income assets under management, is expected to strengthen asset class capabilities and be immediately EPS accretive as well as potentially reduce unit costs, impacting future earnings positively.
  
• The company anticipates significant growth through further M&A opportunities focused on capability and distribution expansion, potentially impacting revenue by diversifying income sources and tapping into new customer segments.
  
• With an expanded investment in ethics capacity and new product offerings in areas like private markets and international equities, the firm is well-positioned to generate new revenue streams and grow its customer base, positively impacting revenue.
  
• Efforts to improve operating leverage and reduce the cost-to-income ratio through strategic partnerships and the consolidation of platform operations are expected to enhance overall profitability and net margins.
  
• Australian Ethical's strong brand recognition and reputation in ethical investing have resulted in one of the highest rates of customer retention and satisfaction, positioning the firm to continue attracting positive net inflows, thereby positively influencing future revenue and profit growth.

Australian Ethical Investment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Australian Ethical Investment's revenue will grow by 12.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 21.6% in 3 years time.
• Analysts expect earnings to reach A$31.0 million (and earnings per share of A$0.27) by about February 2028, up from A$11.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.7x on those 2028 earnings, down from 48.9x today. This future PE is greater than the current PE for the AU Capital Markets industry at 21.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.76%, as per the Simply Wall St company report.

Australian Ethical Investment Future Earnings Per Share Growth

Risks

• The fair value write-down of $2.16 million on the investment in Sentient Impact Group represents a risk, as the business has failed to deliver on growth ambitions, impacting net profit margins and earnings.
  
• The focus on ethical investing, while a unique differentiator, may limit the pool of potential investments and expose the company to valuation or performance challenges, potentially affecting revenue growth.
  
• Fee margin decreases anticipated after the acquisition of Altius Asset Management, with a pro forma margin expected to decrease to approximately 0.9%, could impact overall revenue margins and profit margins.
  
• Investment in scaling up the business has led to increased operating expenses, particularly in employment and IT costs, which could pressure net margins if revenue growth does not keep pace.
  
• The strategic growth investments, including M&A activities, involve execution risks that could impact the anticipated benefits and affect long-term earnings and profitability.

Valuation

• The analysts have a consensus price target of A$6.7 for Australian Ethical Investment based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$143.7 million, earnings will come to A$31.0 million, and it would be trading on a PE ratio of 29.7x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of A$4.97, the analyst price target of A$6.7 is 25.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.