Do you only invest in businesses that are developing a sustainable future? There is no right or wrong answer because each investor is different.
Ethical businesses are growing in popularity. Especially as customers are placing their wallets with the businesses who sustain the environment, aid the local communities and operate under an ethical framework.
On the other hand, Ethical businesses don’t receive the same attraction in the investment world for now. Because some investors believe ethical investments do not generate enough return, do not have enough support in the investment world, and would plummet in times of crisis as ESG investing is not a haven. Now, while we debunk those myths in our ESG article it is important to understand that the stigma around ethical investment is still held by some investors.
Another important distinction is that Ethical Investing is the standpoint of the younger generations. Meaning the growth behind ethical investments will likely skyrocket once the younger people become investors.
Today will discuss why Australian Ethical Investment Fund (ASX: AEF) surged by 194% YTD, their positive and negative financials and whether AEF is worth watching ?
Why has AEF grown 194% YTD?
Australian Ethical Investment Funds (ASX: AEF) focuses on businesses that do not harm animals, sustain the environment and improve social concerns. AEF upholds their ethical standpoints by providing investors with a superannuation fund, a retirement plan and a managed fund.
AEF surged because of increased funding, the bushfires driving discussion around the climate and the appointment of a new CEO. Also, AEF increased because of impressive financials which is analysed below.
Price Sensitive Event (PSE) One: Australian Bushfires
The Australian Bushfires are increasing the discussion about climate change. In turn, more people could possibly have invested their capital or super into AEF, driving share price growth. Now we are not stating that the bushfires were caused by climate change. Instead we are simply explaining how the discussion around climate change might have increased AEF’s customers.
PSE Two: Funder Under Management Update – 5th December 2019
AEF announced a 9% increase in Funds Under Management (FUM) between 31st June – 31st October 2019 (Q1 2020), totalling $3.72 billion. In turn, investors translated an increase in FUM to mean higher returns in the future. Resulting in investors to rally behind AEF, driving the 57% increase between Dec 6th and Jan 20th.
Price Sensitive Event (PSE) Three: John McMurdo appointed as CEO – 4th February 2020
Despite the growth over 2019, AEF took a nosedive at the back end of January, falling 28%. However, the appointment of John McMurdo as CEO revived AEF’s success story.
John McMurdo holds over 30 years’ experience in investment management advice and banking across Australia and New Zealand. With history at AMP and NAB. AEF climbed 20% since the commencement of John McMurdo as CEO. Illustrating the investor confidence in John to bring AEF into the mainstream.
AEF is profitable. Instantly, ticking the first box of our investment criteria. AEF is increasing their profit year on year. For example, profit margins increased by 73% between 2017 and 2018, and 30% between 2018 and 2019. AEF’s consistent surges resulted in the company producing high-quality earnings of $6.61 million for June 2019. Revenues are following in the same footsteps as profit, as AEF reported a 14% increase in revenue over 2019FY, totalling $40.98 million.
AEF’s cash flow decreased by 60% between Dec 31st, 2016 -2017. However, management seems to have turned things around by growing cash flow by 177% since the low in 2017.
Moreover, a profitable company tends to have an impressive ROE. AEF’s ROE is 38.9% and is excellent when compared to the industry average of 9.6% (Simply Wall Street). To add on the cherry on top AEF is debt-free. Meaning, the business produced a speculator ROE without relying on debt.
Despite the stellar financials, we must analyse the negatives (risks). Why? Because YIG believes in providing investors with a balanced perspective on stocks, so you can make an informed investment decision.
Two areas of concern include the recent volatility in the share price and a poor Price to Earnings (PE) ratio. AEF’s PE ratio is 88x or 88:1. Meaning investors are willing to pay $88 in market price for every $1 of earnings. AEF’s PE ratio is poor compared to the industry average of 21.2: 1 and the market of 18.8:1 (Simply Wall street).
Is AEF worth watching?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
AEF is worth watching. The company has an impressive bank of financials, quality funding and is receiving positive publicity. Based on historical trends, if AEF continues to punch record highs and the investment world embraces a sustainable future then more investors are likely to jump on board.
In my opinion, I would create a watchlist of promising ethical ASX companies but not invest. Because ethical investing is a megatrend. Meaning it will not take off for at least another 3-5 years. However, do not wait 5 years because it might too late. Instead, use a watchlist to monitor the emerging industry and be prepared.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.