Challenger Limited

Strengthened AUM to Support Future Growth:Challenger Limited’s (ASX: CGF) management reflected positive views for the FY 2018 performance and it seems that they are quite optimistic about the future growth. They stated that the company witnessed robust momentum in the assets under management or AUM by encountering the growth of 16% YoY in FY 2018 to over $81 billion which would support the company’s future earnings.

 
CGF’s AUM and Net Income (Source: Company Reports)
Another factor which could help Challenger is the company’s strengthened capital position and thus, it would be able to fund the growth opportunities which might arise in the future. Finally, the company’s differentiated business model well-supported it in FY 2018.

In the September 2018 quarter, the company witnessed robust growth momentum with respect to the annuity sales as they rose 7% compared to the prior corresponding period. This strong growth clearly indicates the demand for the risk-free income. Apart from this, increased distribution reach has also been benefiting the annuity sales.

Expansion of Distribution Channel of Annuities Reflects Demand:Challenger Limited is also planning to work on the expansion of the annuities and make them available on Netwealth platform. This decision reflects the growing demand and the advisers would be able to make annuities available to their clients. Moving forward, the annuities sales are expected to witness robust momentum as the company’s annuities would be available on the platforms which are being used by over 70% of the financial advisers that are carrying out operation in Australia. However, the company’s funds management earnings have been aided by the increased average funds under management or FUM.

The FUM of Challenger was supported by the favourable investment markets in September quarter. However, FUM did witness the negative impacts on the back of the net outflows during the same period.

Increased allocation towards secured Income to Underpin Future Prospects: It seems like Challenger Limited is well-positioned to witness robust growth momentum moving forward. The company’s decision to make available its annuities on the Netwealth platform is expected to pay-off moving forward. Moreover, the company is planning to increase its allocation towards the secure income products which is exactly in line with the current market scenario as the company did witness demand for the risk-free income products.

However, the company would also be working to provide superior investment products to the customers. The company is targeting normalised return on equity or ROE of 18% on the pre-tax basis in the long term.
Stock Analysis: On the daily chart of Challenger Limited, Relative Strength Index or RSI is applied by using the default values. As per the observation, the 14-day RSI is near its oversold region and a rebound is expected in near term. Further, with the news that Mr. Brian Benari is retiring from the role of Managing Director and Chief Executive Officer and the Board has appointed Mr. Richard Howes as the new CEO of the company, the stock was further down at low levels. On the other hand, improvement in the company’s annuity sales is expected to help the stock price going forward. Therefore, we maintain our “Buy” rating on the stock at the current price of $10.270, down 4.6% on October 26, 2018.
 

Qantas Airways Limited

Robust Demand Underpinned QAN’s Profit Before Tax: Qantas Airways Limited (ASX: QAN) ended FY 2018 with statutory profit before tax or PBT of $1.39 billion which implies an increase of 18% on the YoY basis thanks to the robust demand as well as revenue environment. These factors have also helped the company in offsetting the elevated prices of the fuel. In FY 2018, the company’s statutory earnings per share or EPS stood at 56 cents which reflects the growth of 21% YoY on the heels of the company’s decision to go for the on-market buy-back of the shares.


QAN’s revenues (Source: Company Presentation)

However, the company witnessed the negative impacts in FY 2018 with respect to the total unit costs on the YoY basis. These impacts resulted from the elevated fuel prices as well as targeted investments with the focus to improve the margins. The company managed to record the YoY growth of 6% in FY 2018 in the net passenger revenues. Its net freight revenues witnessed an increase of 7% thanks to the robust global demand while its revenues from other sources increased by 8% on the back of higher Qantas Club revenues as well as contract work activity.

September Quarter Performance Well-Supported by Revenues, Capacity Discipline: For the three months ended September 2018, Qantas Airways generated total revenues amounting to $4.41 billion implying a rise of 6.3% compared to the prior corresponding period. The higher oil prices generally negatively impact the airline industry because of the higher dependency on the oil for operations. However, the company managed to tackle the increased fuel prices. These costs got largely offset by the capacity discipline as well as net passenger revenue growth.

However, the impact of other costs like increased commissions as well as the effect of the weaker Australian dollar got partially offset by robust performance of the revenues. The September quarter was primarily aided by the higher travelling demand in the leisure as well as business markets.
 
Disciplined Cost Management, Customer Experience to Help Qantas Moving Forward: Moving forward, the performance of Qantas Airways would be riding on the performance of the fuel prices. The company’s management is continuing to maintain it focus on the costs. It plans to make deployments which could help in improving the customer experience as this could help it in witnessing favourable momentum in the margins as well as it could help in outpacing the competition.
Qantas Airways is well-positioned to achieve future growth prospects. For FY 2019, the company has hedged 76% of its fuel while for FY 20 it has hedged 39%. For the 1H FY 2019, the group capacity might be flat. The domestic capacity of the group might witness a fall by circa 0-1% while the international capacity is anticipated to be flat.

Stock Analysis by factoring in Technical Analysis: Relative Strength Index or RSI indicator has been applied on the daily chart of Qantas Airways Limited by using the default values. As per the observation, the 14-day RSI is near its oversold region and is expected to witness a rebound. Therefore, we can say that the bullish might build up once it witnesses a rebound. As a result, we maintain our “Buy” rating on the stock at the present market price of $5.230.
 
 

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