Challenger Limited

Strong Distribution Reach: Challenger Limited (ASX: CGF) is an investment management company which manages assets worth $81 billion as of 30 September 2018. It is focused on providing customers with financial security for retirement. It has two core investment businesses i.e., a fiduciary Funds Management division and an APRA-regulated Life division.  Recently, CGF launched a plan to make the full range of fixed-term and lifetime annuities available through the fast-growing Netwealth platform. As per the release, the Challenger’s range of annuities will soon be accessible to more than 70% of financial advisers through their primary platform, including traditional retail platforms and fast-growing specialist platforms like Netwealth. Moreover, Challenger’s Australian annuity sales increased 21% in Q1FY19 as compared to the pcp, benefiting from expanded distribution reach, and the growing number of retirees and higher average super balances at retirement. Hence, we expect that this annuity relationship with Netwealth will further expand Challenger’s distribution reach thereby supporting sales growth in years to come.

On the analysis front, Average FUM grew 19% to $73.4 Bn in FY18 over the prior year because of continued strong net flows and positive investment markets. Funds Management net flows was of $5.3 billion in 2018. Additionally, For FY19, CGF expects normalised net profit before tax growth in the range of 8%-12% over the prior year. Further, the group expects RoE of 18% in FY19.

Over the period, the company has built a robust relationship with many big annuities’ companies like Colonial First State, Link Group, Clearview, Suncorp, Mitsui, Sumitomo Primary life Insurance, Standard Life Investments, AMP, BT Challenger, HUB, etc. Hence, we believe that this new and existing relationship with marquee distribution partners will support growth momentum in years ahead.


Distribution – New relationships (Source: Company Reports)
Challenger Limited, a substantial holder of AUB Group Limited changed its holding from 9.47% of interest to 7.60% of the voting power. Meanwhile, the share has fallen 7.37% in the past three months as at October 19, 2018 and traded close to reasonable PE of 21.43x. Hence, we maintain our “Buy” recommendation on the stock at the current market price of $11.52, considering aforesaid facts.
 

Collins Foods Limited

Strong cash flow supporting strategic growth: Collins Foods Limited (ASX: CKF) is an Australian listed public company which operates fast food restaurants in Australia. Recently, the company issued 208,953 fully paid ordinary shares under performance rights granted as equity compensation benefit in accordance with the Collins foods limited executive and employee incentive plan. Moreover, Milford Asset Management Limited ceased to be a substantial holder of the group since October 05, 2018. It was observed that operating cash flow and dividend payment increased by around 80% and 125%, respectively over the last five years on the back of strong performance. On the valuation front, the company has a price-to-earnings ratio of 21.430x. It has posted a return on equity (RoE) of 10.8%, return on invested capital (RoIC) of 6.0 percent and has debt-to-equity ratio 0.86x in FY18. Over the last five years, the company’s revenue and underlying PAT have grown at a CAGR of 12.7 percent and 18.9 percent, respectively. Going forward, the company will continue growing across the region at the back of the rising restaurant network, and product innovation i.e., Taco Bell brand, etc.


Strong cash flow supporting strategic growth (Source: Company Reports)

Meanwhile, the share has risen 27.72 percent in the past three months (as at October 19, 2018) and has a support level of $6.087. By looking at strong cash flow and positive outlook underpinned by organic and inorganic growth, we maintain our “Buy” recommendation on the stock at the current market price of $6.620.

Qantas Airways Limited

Update on Buyback Share Event: Qantas Airways Limited’s (ASX: QAN) stock climbed up 1.073% on October 22, 2018 following launch of Northern winter 2018/19 season plans to commence reciprocal codeshare partnership between Cathay Pacific and QANTAS. As per the partnership, it will cover selected routes between Australia and Hong Kong, and domestic Australia and routes beyond Hong Kong. Recently, the group has updated the market about the progress on several transactions under its ongoing buy-back event. The group indicated to buy back shares with an aggregate total consideration of $332 million. As of now, the group has bought back a total of 2,79,86,281 shares via on-market trade for the total consideration of A$ 16,17,01,237.47. Following this, the remaining consideration to be paid for shares under the buy-back is $170,298,762.53.

From the analysis standpoint, gross margin stood at 56.7% in FY18 which is above the Industry median of 41.3%. EBITDA margin and net margin came in at 19.2% and 5.7% in FY18 which is broadly in-line with industry mean and the company has improved from the previous year. QAN has consistently generated value for the shareholders with ROE for FY18 at 26.2% compared to 25.1% in FY17 and 12.1% industry average.

Integrated Group Portfolio Weighted to Domestic Australia (Source: Company Reports)

Meanwhile, the stock has generated a YTD return of 10.69% and has managed to stay above the support level of $5.02. Currently, it traded at reasonable PE level and EV/EBITDA level of 9.980x and 3.80x, respectively which is below the Industry mean of 23.95x and 16.10x. Based on foregoing, we, therefore, maintain our “Buy” recommendation on the stock at the current market price of $5.650.
 

Comparative Dividend Yield Chart (Source: Thomson Reuters)
 
 
 

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