Integration Of Altius And Transition To GROW And State Street Will Deliver Operational Improvements

Key Takeaways

• Successful integration of Altius Asset Management and completion of platform initiatives are enhancing revenue growth and improving cost efficiencies.
  
• Ongoing infrastructure investment and strategic acquisitions aim to drive future revenue growth and operational scalability.
  
• Integration challenges and increased costs from new services and products could pressure margins, while uncertain M&A activities and strategic spending add financial risks.

Catalysts

Australian Ethical Investment Ltd is a publicly owned investment manager.

• The successful integration of Altius Asset Management, which brought in A$1.93 billion in funds under management (FUM), enhances revenue growth through increased scale and aligned capability, potentially boosting revenue and net margins.
  
• Completion of key platform initiatives such as the super administration transition to GROW and custody transfer to State Street are expected to deliver cost efficiencies and operational improvements, positively impacting net margins through reduced unit costs.
  
• Ongoing investment in infrastructure and technology, including the uplift of front-office investment systems, is building a scalable, institutional-grade business platform, enabling future revenue growth and improved operating leverage.
  
• The focus on expanding the values-aligned organization channel and non-superannuation market, supported by new product development and channel diversification, is expected to drive further organic revenue growth.
  
• Future acquisitions, like the potential acquisition of Future Super, may bring about additional scale and capability, leading to enhanced revenue capture and cost efficiencies, positively impacting earnings.

Australian Ethical Investment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Australian Ethical Investment's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.4% today to 23.0% in 3 years time.
• Analysts expect earnings to reach A$35.5 million (and earnings per share of A$0.31) by about April 2028, up from A$14.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.3x on those 2028 earnings, down from 44.7x today. This future PE is greater than the current PE for the AU Capital Markets industry at 14.3x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

Australian Ethical Investment Future Earnings Per Share Growth

Risks

• The transition to new superannuation administration and custody services led to a temporary disruption in flows, which could impact revenue if similar issues occur in the future.
  
• Potential reduction in revenue margin due to integration of Altius Asset Management's lower-margin fixed income products, impacting earnings.
  
• Increased operating expenses, particularly employee costs, could reduce net margins if growth does not outpace these expenses.
  
• Uncertainty from potential M&A activities, while potentially beneficial, carries integration risks that could affect financial performance.
  
• Focus on marketing and strategic projects could lead to increased costs without guaranteed corresponding revenue growth, potentially impacting net profits.

Valuation

• The analysts have a consensus price target of A$7.1 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$153.9 million, earnings will come to A$35.5 million, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of A$5.84, the analyst price target of A$7.1 is 17.7% 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.