Stocks’ Details

Challenger Limited

Decent Growth in Total Life Sales: Challenger Limited (ASX: CGF) is a diversified financial services entity having core businesses in annuities, funds management and administration platforms. The market capitalisation of the company stood at $2.7Bn as on 22^nd April 2020. During Q3 FY20, the company reported total Life sales amounting to $949 million, reflecting a rise of 9% on pcp due to strong Japanese and institutional sales. Total assets under management stood at $79 billion, indicating a decline of 8% because of significant investment market sell-off in March 2020. CGF stated that these results highlight the impact of COVID-19 pandemic on investment markets and consumer activity.


Life Sales for 1H FY20 (Source: Company Reports)

Guidance for FY20:  CGF expects normalised net profit before tax in the range of $500 million and $550 million for FY20. This reiterated guidance indicates 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.

Valuation Methodology: P/BV Multiple Based Relative Valuation

P/BV Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Net margin of the company stood at 18.2% in 1H FY20, reflecting a YoY growth of 17.5%. This implies that CGF has improved its capabilities to convert its topline into the bottom line. Return on equity of the company stood 6.0% against the industry median of 5.8%. We have valued the stock using P/BV based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). The stock of Challenger is inclined towards its 52-week low level of $2.820. Hence, considering the decent growth in total life sales, improvement in net margins and returns provided to shareholders, we give a “Buy” recommendation on the stock at the current market price of $4.370 per share, down by 0.907% on 22^nd April 2020.

HUB24 Limited

Strong Net Inflows During Q3 FY20: HUB24 Limited (ASX: HUB) provides investment and superannuation platform services, and the market capitalisation of the company stood at $578.18 Mn as on 22^nd April 2020. Recently, the company updated the market with the results for Q3FY20 (March 2020), wherein, it reported strong net inflows amounting to $1.4 billion, reflecting a rise of ~72%. This was underpinned by strong support from the large national licensee and broker channels and new business from boutiques and self-licensed advisers. Funds under administration for the quarter stood at $15.1 billion, down by 13.1% since 31^st December 2019, because of negative market conditions.
 

Key Metrics (Source: Company Reports)

What to Expect: The company stated that the movements in FUA directly impact its revenue. Hence, the decline in FUA during Q3 FY20 is likely to impact its administration fees and earnings for FY20. It added that the recent reduction in the official cash rate by the RBA (Reserve Bank of Australia) would also impact its revenue.

Stock Recommendation: Gross margin and EBITDA margin of the company stood at 67.2% and 19.6% in 1H FY20, reflecting growth of 10.1% and 8.2% on YoY basis, respectively. Current ratio of HUB stood at 3.44x in 1H FY20 as compared to the industry median of 1.37x. This reflects that HUB is in a decent position to address its short-term obligations. HUB has an EV/Sales multiple of 5.5x against the industry average of 7.8x on TTM basis. Therefore, in light of a decent liquidity position, strong net inflows during Q3 FY20 and improvement in key margins, we give a “Buy” recommendation on the stock at the current market price of $9.530 per share, up by 3.587% on 22^nd April 2020. 
 

MyState Limited

Banking Subsidiary Became an Approved Lender: MyState Limited (ASX: MYS) is a non-operating holding company of the diversified financial services Group consisting of MyState Bank and TPT Wealth. The company recently noted that its banking subsidiary, MyState Bank, has become an approved lender under the Coronavirus SME Loan Guarantee Scheme of the Federal Government. This allows eligible small and medium businesses to access unsecured loans up to $250,000, with concessional repayment terms. In addition, the loan has a tenure of 3 years, with no repayments for the first six months, with principal and interest payments after that period. The loan has a variable interest rate of 5.5% p.a. The below picture depicts the financial performance of the company for 1H FY20:


Financial Performance (Source: Company Reports)

Focus for Future: The company is focused on revenue growth via improvement in banking business balance sheet, focus on margin improvement and FUM growth through mainland distribution.

Valuation Methodology:Price to Cash Flow Multiple Based Relative Valuation

Price to Book Value Multiple Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: In response to COVID-19, MyState Bank has decreased fixed home loan rates by up to 0.80%, which will lighten the load for the business. During the span of one month, the stock of MyState has gained 14.29%. We have valued the stock using P/CF based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). Thus, considering the decent outlook, stock price movement and valuation, we maintain a “Hold” rating on the stock at the current market price of $3.670 per share, down by 2.394% on 22^nd April 2020. 

 
Comparative Price Chart (Source: Thomson Reuters)

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