Challenger Limited

CGF Details

H1FY21 Update: Challenger Limited (ASX: CGF) has over thirty years of commercial expertise across financial services and accounting experience in Australia and internationally. Challenger Life is one of the biggest players in the annuities space in Australia. CGF witnessed 11.3% growth in assets under management (at $96.1 billion) in H1FY21 over pcp. It also experienced an increase in sales across its key life product categories, therefore, life sales grew by 10% YoY to $3.4 billion. Owing to the benefit of investment experience worth (+$87 million), CGF reported a $2.4 million growth in statutory net profit after tax to $222.8 million over PCP. This has helped to offset the reduction in normalized earnings. 

Financial Highlights (Source: Company Reports)

Q3FY21 Performance Update: Owing to the combination of Life annuity book growth and sustained market-leading funds management net flows, the group’s assets under management (AUM) rose 8% YoY to surpass $100 billion marks. Driven by $7.0 billion of net flows, the overall funds under management increased by 9% YoY. Life investment assets rose 6% YoY supported by record quarterly annuity sales of $1.6 billion along with the highest growth in Life book of 9.2% YoY in Q3FY21.

Outlook: CGF is aiming to achieve a normalized net profit before tax in the range of $390 million and $440 million in FY21. Further, it remains strongly capitalized owing to acceleration in its customer base.

Key Risks: Due to a tighter credit spread, it expects to achieve normalized profit at the lower end of the guidance range in FY21. It is addressing the investment conditions by significantly adjusting annuity pricing. Besides, CGF is also exposed to broader risks like regulatory risk along with funding and liquidity risk, investment and pricing risk, among others which will directly impact its profitability.

Valuation Methodology: Price/Book Value Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has given a stronger close for the ongoing week at $4.86, forming a ‘Bullish Harami’ pattern on the chart with body of the candle contained in the previous week’s bearish candle thereby signalling potential bullish reversal for the stock. The technical indicator RSI with a reading around 36 and a curve at the end pointing up, suggests gaining of momentum.

Going forward, the stock may have resistance around a 50% retracement level of $5.47 whereas support could be around $4.00.

Stock Recommendation:

The stock declined by ~25.2% in 1 month and by ~20.9% in 3 months. It has made a 52-week low and high of $3.550 and $7.370, respectively and is trading towards the 52-week lower levels. Therefore, it can be said that the current trading juncture is offering decent opportunities for accumulation.

We have applied Price/Book value-based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a slight discount to Price/Book Value Multiple (NTM) (Peer Average) considering a tighter credit spread.

However, considering its robust assets under management which surpassed $100 billion for the first time, along with its diversified revenue streams in the Life business and a differentiated funds management offering, and decent outlook, we give a “Buy” recommendation on the stock at the current market price of $4.86 per share, up by 0.413% on 11^th May 2021.

Navigator Global Investments Limited

NGI Details

H1FY21 Update: NGI is a diversified asset management holding company. It partners with management teams that operate institutional businesses globally. Further, it provides alternative asset management and services to institutional investors worldwide through its Lighthouse Investment Partners business. Due to the decline in average AUM and average fee rate, NGI recorded a 19% fall in management fee revenue to US$37.7 million over PCP. However, it witnessed a solid 166% YoY rise in performance fee revenue during the period to US$9.8 million driven by sturdy investment performance attained from its entire portfolios, mainly in the December 2020 quarter. It has declared an unfranked dividend of 3.5 cents per share, down by 59% YoY over pcp. Meanwhile, NGI logged a 21% YoY decline in underlying EBITDA to US$15.1 million over pcp. Accordingly, it posted a 35% YoY decline in net profit after tax to US$8.8 million.

H1FY21 Financial Highlights (Source: Company Reports)

AUM Update for March 2021 Quarter: NGI, on 19 April 2021, declared that the estimated group’s total Assets Under Management (AUM) as of 31 March 2021 stood at US$20.7 billion, of which, AUM of Lighthouse Investment Partners was US$13.7 billion, and the rest accounted for a portfolio of minority interests in alternative asset managers, adjusted for NGI’s ownership interest.

Outlook: The company highlighted a strong investment performance in the December 2020 quarter, offers a decent base to build on for the rest of FY21. Meanwhile, it has guided to achieve an underlying EBITDA in the range of US$28 to US$31 million in FY21. Meanwhile, the group has closed six minority interests’ acquisitions in established alternative asset managers from investment funds managed by Dyal Capital Partners, a division of Neuberger Berman on 1 February 2021.

Key Risks: Sharp volatility in the global markets can hurt investment performance. Further, due to its business interest in overseas operations, significant volatility in the AUD vs USD exchange rate would influence its result.

Valuation Methodology: Price/Book Value Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The stock rose by ~15.2% in 9 months and declined by ~28.7% in 3 months. It has made a 52-week low and high of $1.13 and $2.32, respectively as is trading towards the 52-week lower levels. We have applied Price/Book value-based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a slight discount to Price/Book Value Multiple (NTM) (Peer Average) considering its net outflows from Commingled Funds in H1FY21 as Commingled Funds constitutes 27% of AUM as of 31 December 2020.  For the purpose of relative valuation, we have taken peers like Perpetual Ltd (PPF.AX), Pacific Current Group Ltd (PAC.AX), Macquarie Group Ltd (MQG.AX), to name a few. Meanwhile, it is witnessing signs of demand for its equity portfolios and platform services which will drive growth for the Lighthouse business.

Considering, the aforementioned factors, solid financial position, and decent outlook, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.475 per share, down by 0.338% on 11^th May 2021. 

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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