Australian Ethical Investment Limited

Company Overview: Australian Ethical Investment Limited (ASX: AEF) manages funds management business. The Company fosters a coalition of the investors and process through the channels including direct customers, employers, advisers, institutions and exchange traded. It provides product packaging products and manufacturing products which then further cover super & pension, managed funds, SMA in the first category and Investment management in the second. In investment management product, the company manage domestic equities (including NZ), international equities, income and fixed interest and multi-asset funds.

AEF Details

3QFY22 & Business Updates:

• FUM Update: With the ~4% increase in its customers, a total of 5,191 new customers joined and contributed towards a total of 79,909. FUM stood at ~$6.83 billion as of 31^st March 2022, which is ~1.6% lower than that of 31^st December 2021 but the overall movement has been positive ~13% upside since 30^th June 2021.

FUM Details (Source: Analysis by Kalkine Group)

• MOU Signing for a probable Merger: Its superannuation subsidiary Australian Ethical Superannuation Pty Ltd has gone under the signing of MOU (non-binding period) with Christian Super to explore a probable merger. The due diligence period is expected to be completed by the end of May 2022 and later to which the merger will allow AEF to manage +$9 billion (on behalf of 100,000 Australians) covering the variety of superannuation, managed fund, and ETF products.
• Substantial Shareholding: As per 20th April 2022 announcement, AEF increased its voting power to ~11.43% and 9.32% in CV Check Ltd and Capitol Health Limited, respectively.
• Net Flows: AEF’s netflows stayed positive mainly owing to continuous strong superannuation contributions including rollovers from new customers joined and SG contributions. Moreover, managed net flows also remained positive but got affected by the market volatility and cautious sentiments.

Net Flows (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 24.95% of the total shareholding, while the top 4 constitute the maximum holding. Thier (James Andrew) and Le Couteur (Caroline Margaret) are holding a maximum stake in the company at 4.51% and 3.80%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: AEF’s current ratio stood at 1.94x which decreased on pcp basis but stands greater than industry median of ~1.41x. Moreover, with 22.9% as its ROE in 1HFY22, it is substantially higher than industry median of ~5.9%.

Current Ratio & ROE Trend (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 Pandemic: Travel restrictions and lockdowns due to COVID-19 pandemic might hold down its operations of mining and thereby affecting its earnings, cash flow and financial position.
• Merger Risk: As the company’s has recently entered an MOU of a potential merger, the company is prone to the risks involved with synergies.
• Regulatory Risk: The company is exposed to a more complex regulatory environment; any failure in the same could lead the business to fines, penalties, etc.
• Market Risk: AEF’s business is quite susceptible to the cautious market sentiments and overall volatility.

Outlook: During the half-year, the company launched new products, won multiple awards and fast paced its strategic growth with an acquisition of minority stake in Sentiment Impact Group. The company focuses on digitizing the customers’ experience and transform its back-office operations to scalable technologies. In Q3FY22, AEF registered $6.83 billion in funds under managed, accompanied by positive netflows. During the period, the company witnessed string superannuation netflows and a 4% jump in customers, suggesting potential uptrend in netflows. With process of potential Christian Super merger, the company has signed MOU and its due diligence is to be completed by 2023, where Christian Super members will join Australian Ethical Super via successor fund transfer (SFT) in late 2022 and early 2023. The merger will place AEF to manage +~$9 billion which will cover the variety of products like superannuation, managed fund, and ETF products. Moreover, AEF also plans to take up multiple key initiatives launch in the second-half 2022 along with the deploy the resources in M&A opportunities and strategic growth areas, hence expects its expenses to increase in 2HFY22 over 1HFY22.

Technical Analysis:  After getting significant rally in 2021, AEF prices have declined sharply from its 52-week high levels. The stock is trading in a bearish territory after the price broke an upward sloping trend line by downside in February 2022. However, prices are now has come down to a crucial support level and prices might took support of its 138.6% golden Fibonacci extension supply zone on a monthly chart. RSI (14-period) is trading near to oversold region at ~31.99 on a weekly chart that indicates the stock might rebound from key support levels. Immediate support levels are AUD 5.04 and AUD 4.14 while immediate resistance levels are AUD 7.43 and AUD 8.17.

Stock Recommendation: The company is trading near its 52-week low of $5.810, proffering a decent opportunity for accumulation. Considering the decent liquidity position, high ROE maintained, virtually lower Debt levels, potential synergies with probable merger with Christian Super, current price trading at support levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $5.950, down by ~1.162%, as of 26^th April 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

AEF Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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