Share Price, page-283

Your PE ratio of 30x doesn’t take a couple of things into account
1. Ethical investing is currently under penetrated. There is an inherent benefit of having a name called ‘Australian Ethical’. Google ethical superannuation and thr first thing that comes up is Australian Ethical
2. MFG’s profit margins are well above 30%. Funds management is a scale business. As FUM grows, it doesn’t mean marketing expenses go up in line with FUM. Therefore, having a profit margin of 30% is conceivable.
3. AEF has been growing FUM at a CAGR of 25%+. If we assume they can grow FUM at 15% CAGR over the next 10 years at a revenue margin of 0.9% (below the current 1.1%) and at a profit margin of 30%, the value without taking time value of money is more than 3x todays.

Price to earnings ratio is one of many tools that an investor should use. However, there are inherent limitations as it doesn’t for example take into account that Ethical Investing is expected to be very popular as investors become more conscious of their investment decisions. Also, PE is a comparison tool and you must assume a steady state earning profile for that ‘e’ part of PE ratio. That is not the case for AEF as it’s clearly in the growth phase.