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Australian Ethical (ASX:AEF) share price dives on HY21 report – time to buy?

The Australian Ethical Investment Limited (ASX: AEF) share price is getting whacked today as the market responds to the company’s first-half results.

At midday, the Australian Ethical share price had tumbled 10% lower after enjoying a scintillating start to the year.

What did Australian Ethical announce?

Led by strong investment performance and growth in funds under management (FUM) and members, revenue increased 10% to $25.6 million for the half.

FUM increased by 30% to $5.05 billion, underpinned by $0.42 billion in new inflows and $0.57 billion in market movements. Members grew 22% over the past 12 months to a total of 62,823.

Superannuation delivered net flows of $253 million, up 27%, driven by higher rollovers and increased super guarantee contributions.

Managed Funds recorded 82% growth in net inflows to $121 million, indicating a growing interest in ethical investing outside of superannuation.

Despite strong growth in FUM, revenue growth was limited by a falling revenue margin for the 12 month period, decreasing from 1.17% to 1.07%, driven by fee reductions on a range of fund offerings.

Net profit after tax rose 17% to $5.2 million, with an underlying profit after tax of $4.9 million, up 11% compared with the prior comparative period.

The business remains well-capitalised with $20.8 million cash on hand and no debt.

The board declared a fully franked interim dividend of 3 cents per share for the half, an increase of 20% on the previous year. This puts Australian Ethical shares on a trailing dividend yield of around 1%.

Looking ahead

Management noted the business will incur higher operating expenses in the second half, mainly due to the timing of expenditure, in addition to further investment in strategic initiatives and regulatory projects.

The fee percentage will also continue to reduce as FUM grows to increase competitiveness and pass on scale benefits to customers.

Commenting on the outlook, chief executive John McMurdo said: “Like all fund managers Australian Ethical is highly leveraged to financial markets with volatility expected to continue into the second half of this financial year. However, we are in an enviable position with no debt, strong cashflows and positive momentum as Australians continue to open their eyes to the many benefits of ethical investing.”

My take

Australian Ethical has consistently delivered outstanding results. FUM has a 5-year growth rate of 29% per annum, which has translated into an operating revenue growth rate of 18% per annum and net profit growth of 49% per annum.

The business has fantastic unit economics and as FUM scales, more cash drops to the profit line. It operates in a unique industry niche of ethical investing, which is becoming increasingly mainstream.

I believe the business has many years of growth ahead as long as it can maintain its revenue margin. Valuation is my only concern, so I will be looking to pick up shares on any temporary weakness.

If you are interested in other ASX growth share ideas, I suggest getting a Rask account and accessing our full stock reports. Click this link to join for free.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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