Challenger Ltd

Certain weakness including decline in statutory net profit after tax for FY 18: Challenger Ltd.’s (ASX: CGF) stock fell 0.09% on September 25, 2018 while the market expects a further downfall in price up to $10.50. The delay of the implementation of MyRetirement may impact the stock a bit while company’s leading position in the annuities market shows that it is a major winner from the proposals. CGF is trading about 20x forward earnings, which is expensive given the company’s current growth profile.
 
CGF focuses on providing financial security in retirement space and operates through the segments comprising of Life and Funds Management. On the other hand, for FY 18, CGF reported 19% decline in Statutory net profit after tax, including an investment experience, to $323 million. Normalised pre-tax return on equity (ROE) was also lower at 16.5%, after the company made $500 million strategic equity placement to MS&AD Insurance Group Holdings, which is the parent company of Challenger’s Japanese annuity partner Mitsui Sumitomo Primary Life Insurance Company (MS Primary). However, in FY 18, AUM grew 16% to more than $81 billion. Average FUM increased 19% to $73.4 billion on the prior year due to continued strong net flows and positive investment markets. Funds Management net flows was of $5.3 billion in 2018. For FY19, CGF is expecting normalised net profit before tax growth on FY18 to be in the range of 8% and 12%. Further, the company expects an overall normalised pre-tax return on equity to be of 18%, with FY19 normalised pre-tax return on equity expected to increase from FY18 but not reach the target. CGF for FY 19 targets a fully franked dividend payout ratio in the range of 45% to 50% of normalised profit after tax, which is subject to prevailing market conditions and capital allocation priorities. Additionally, there has been significant focus on policy areas that affect retirees. The Government has announced new means test rules for wide range of retirement income products to support their development and use. These new rules will be effective from 1 July 2019 and expected to provide a strong foundation to further grow the use of lifetime income products.
 
Meanwhile, CGF stock has fallen 9.95% in three months as on September 24, 2018  and is trading at a P/E of 20.44x. Based on the foregoing, there is an expectation that the stock may fall a bit further and may then be relooked for an investment opportunity given long term view on annuity play. We have a wait and watch view on the stock that trades at the current price of $ 11.030.
 

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