Company Overview: Australian Ethical Investment Limited (ASX: AEF) oversees the funds management business and promotes a coalition of investors and process through the channels. The channels include direct customers, employers, advisers, institutions and exchange traded. It offers product packaging and manufacturing products, where packaging products include cover super & pension, managed funds and SMA. On the other hand, manufacturing products include investment management, where the company manages domestic and international equities, income & fixed interest and multi-asset funds.

AEF Details

Securing Positive Net Flows in 3QFY22:

• Incrementing Customers: With a total of 5,191 new customers joining (up 4%), the total customers have reached 79,909.
• Positive Net Flows: Though, FUM slipped due to market volatility 1.6% to $6.83 billion as of 31^st March 2022 as compared to 31^st December 2021, but the overall YTD movement has been positive 13% upside since 30^th June 2021. Net flows remained positive for the quarter, mainly owing to strong superannuation contributions (including consistent SG contributions along with new joiners). However, managed net flows got affected by the market volatility and cautious sentiments.

Focal Areas of Investment:

• Sectors: The company have IT (20.9%), Healthcare (14.3%) and Communication Services (11.4%) sectors’ companies as the main focal point to invest. It invests in companies, which improve efficiency, encourage innovation, and reduce environmental footprint. On the other hand, it’s one of the least focal points comprises the fossil fuel companies.
• Asset Type: 51% of company’s investments is done in Australian & NZ Equities and 22% in the International Market.

AEF’s Focal Areas (Source: Analysis by Kalkine Group)

Change in Substantial Shareholding: Recently, the company has been doing changes in the substantial shareholding in other companies and increasing their voting power in the respective companies (mentioned below).

Substantial Shareholding (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 debt-to-equity ratio stood at 0.05x, which has shown a continuous decline in the past months. Moreover, with 84.20% as its gross margin, the company maintains a good gross margin as of 31 December 2021.

Debt Profile & Return (Source: Analysis by Kalkine Group)

Key Risks:

• Merger Risk: As the company has recently entered into an MOU of a potential merger, inefficient execution of which might cause the company to face risks attached.
• 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: The potential Christian Super merger’s due diligence is expected to be completed by 2023, where the Christian Super members will join Australian Ethical Super via successor fund transfer (SFT) in late 2022 and early 2023. The potential synergies expect AEF to bring ~$9 billion funds on board, covering the variety of products like superannuation, managed fund, and ETF products. During half-year FY22, the company launched new products, won multiple awards and fast moved its strategic growth. Moving forward, AEF focuses on digitizing the customers’ experience and transforming its back-office operations to scalable technologies and expects its revenue for 2^nd half to grow. Additionally, with the increased headcount and growing substantial shareholding in the companies, AEF plans to take up multiple key initiatives launch in the second-half 2022 along with the deploying the resources in M&A opportunities and strategic growth areas, therefore assumes its expenses to increase in 2HFY22 over 1HFY22.

Technical Analysis:  AEF prices declined significantly in the past seven months after the prices broke its crucial support level of AUD 8.15 on a monthly chart in February 2022. Prices are now taking support of the downward sloping trend line and also trading near to its 50-period SMA from where prices might reverse to its key resistance levels. There is a positive RSI divergence with the price clearly visible on a daily chart that also supports the bullish stance. RSI (14-period) also came down to its oversold territory at ~38 that indicates prices might reverse from key supporting levels. Immediate support is at ~$4.550, and resistance is at ~$5.930.

Stock Recommendation: The company is trading near its 52-week low of $5.010, creating a good time to accumulate. Considering the decent liquidity position, rising customers in 3QFY22, high ROE and gross margins maintained as compared to industry median, virtually lower debt levels, potential synergies with Christian Super merger, 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 $5.120, down by ~0.775%, as of 7^th June 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.

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