Challenger Limited

 CGF Details

Top-line Growth: Challenger Limited (ASX: CGF) is an investment management firm that operates two core investment businesses, a fiduciary Funds Management division and an APRA-regulated Life division. Over the last four years, the company has witnessed significant improvement in its top line. From 2016 to 2019, the company’s revenue and gross profit have increased at a CAGR of 10.19% and 9.89%, respectively.

Equity Raising Update: On 22 June 2020, the company launched an equity raising to strengthen its capital position and provide flexibility to enhance earnings. The equity raising comprises a fully underwritten institutional placement (Placement) of $270 million and a non-underwritten share purchase plan (SPP), targeting to raise up to $30 million. On 23 June 2020, the company announced that it has completed the $270 million fully underwritten institutional placement and received significant interest from both domestic and offshore institutional investors. Under the placement, the company will issue around 55 million new fully paid ordinary shares to institutional investors at $4.89 per share. Under its Share Purchase Plan, the company is offering existing eligible shareholders the opportunity to apply for up to $30,000 in new, fully paid Challenger ordinary shares, without incurring brokerage or transaction costs. The SPP offer was scheduled to close on 21 July 2020, with announcement of results expected on 24^th July 2020.

Equity Raising Timetable (Source: Company Reports)

Maintaining a Decent Capital Position: The company currently holds 1.63 times APRA’s minimum capital requirement as at 31 May 2020. After the equity raise, this ratio is expected to increase to 1.78 times and the CET1 ratio is expected to increase from 1.01 times to 1.17 times, on a pro forma basis. Further, the company has additional financial flexibility including a $400 million Group banking facility, of which $350 million remains undrawn. Lately, the company has reduced capital intensity and maintained a strong capital position by repositioning the portfolio to more defensive settings, resulting in increased cash and liquidity of over $3 billion.

March Quarter Performance: During the March 2020 quarter, the company reported total Life sales of $949 million, up 9% on pcp, driven by strong Japanese and institutional sales. The company’s total assets under management (AUM) reduced by 8% to $79 billion in the March quarter, following the significant investment market sell-off in March. Funds Management funds under management (FUM) stood at $74.8 billion in March quarter, down by 10% on pcp, impacted by the significant equity market sell-off as a result of Coronavirus and increased redemptions by superannuation funds seeking liquidity.

Key Risks: The company is exposed to several risks, including funding and liquidity risk; investment and pricing risk; counterparty risk; business and reputational risk; operational risk; licence and regulatory risk; cyber and information security risk; and environmental and social risks. The company is exposed to the regulatory and political changes impacting financial services participants.

What to Expect: In FY20, the company expects its normalised net profit before tax to be around the lower end of the guidance range of $500 million - $550 million, reflecting the impact of changes to Life’s investment portfolio and lower Funds Management earnings from lower funds under management following the equity market sell-off. Looking ahead, the company expects the proceeds from the recent capital raising to back the investment-grade fixed income opportunities that provide compelling risk-adjusted returns. The company has scheduled to release its FY20 results on 11 August 2020. 

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CGF has declined by 48.13% in the past six months and is inclined towards its 52 weeks low of $2.82, offering a decent opportunity for accumulation. For H1FY20, the company’s gross margin and net margin stood at 91.1% and 18.2%, respectively. We have valued the stock using the Price to Earnings multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like Pendal Group Ltd (ASX: PDL), IOOF Holdings Ltd (ASX: IFL), and AMP Ltd (ASX: AMP). Considering the company’s top-line growth, recent equity raising, capital position, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $4.370, down by 1.577% on 21 July 2020. 

CGF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.