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Mid-Cap

Challenger Limited + G8 Education: Are these appealing over long-term?

September 27, 2015 | Team Kalkine
Challenger Limited + G8 Education: Are these appealing over long-term?

Challenger Ltd



Returns through annuities: Challenger Limited (ASX: CGF) has been in limelight as a long-term payer in terms of delivering returns to its annuity buyers. In view of the fact that there is less impact on annuities in comparison to shares when the market swings, annuities holder have a better bet and get to have a steady income stream. Thus, the company aims to provide financial security in retirement through annuities. This along with the market leading position gives CGF an opportunity to outdo many in the same segment.

Better than estimated performance: Assets under management reported an 18% yoy increase to $59.8 billion in the fiscal year of 2015. Moreover, the group achieved a record total Life product sales growth of 9% yoy to $3.7 billion during the period while the Funds Management generated organic net flows of $2.9 billion in the same period. Accordingly, the group’s normalized EBIT rose 13% yoy to $438 million in FY15. But the statutory net profit after tax fell by 12% yoy to $299 million during the period and consequently the statutory EPS decreased 17% yoy to 54.8 cents. CGF delivered a full year dividend of 30 cents, which is an increase by 15% against pcp. The group’s cost to income ratio decreased by 80 basis points to 33.8% against pcp.



Financial Performance during FY15 (Source: Company Reports)

Stock outlook:  CGF is heavily investing on new streams to generate growth via partnerships with super funds. The group is also enhancing its multi-boutique fund manager model into Europe. CGF is the seventh largest fund manager and has a good competitive advantage, as over 80% of planners who were intending to recommend an annuity use its product. The group’s Funds under management generated a 25% compounded annual returns from 2011. Challenger recently launched CarePlus, a new aged care product to capture the aged care market. Meanwhile, CGF issued a Life cash operating earnings guidance in the range of $585-595 million during fiscal year of 2016, which is an 11% rise in cash operating earnings on a like-for-like basis. CGF’s return on equity reached 18.6% in second half of 2015, and intends to maintain ROE in the range of 18% for FY16 as well. The group’s stock rallied over 5.5% over the last three months (as of Sep 21 close), despite the broader S&P/ASX 200 pressure. We believe that Challenger is trading at relatively cheaper valuations, as compared to peers having a P/E of 13x CGF has an annual dividend yield of around 4.2%. We believe that the stock has potential to grow further, despite delivering year to date returns of 8.7%. Accordingly, we recommend a “BUY” on CGF at the current price of $7.17.


CGF Daily Chart (Source: Thomson Reuters)
 

G8 Education Ltd



Stepping down of the Chairwoman and the impact on shares: Post losing the bid for Affinity Education to Anchorage Capital Partners, G8 Education’s (ASX: GEM) chairwoman, Jenny Hutson, is all set to exit from the board after a period of expansion steered by acquisitions that transformed GEM from a small entity to a big ticket operator in education and childcare segment. Matthew Reynolds is said to be in the shoes of the acting chairman for a short-term and a replacement will be identified soon. This news has of course impacted the share price to a great extent. GEM targeted Affinity to strengthen its Australian childcare centers. However, the group acquired over 16.4 per cent stake in affinity leveraging its weak share prices. On the other hand, Affinity Education agreed the terms of Anchorage Capital which bid for 92 cents per Affinity security, against the GEM’s recent cash offer of 80 cents for each Affinity share.
 
Organic as well as acquisitions growth drove the First half of 2015 Performance: GEM had 457 centers in Australia and 18 centers in Singapore, after adding 21 new centers in first half of FY2015. The group is yet to settle 17 more centers, and after this GEM expects to have 35,125 licensed places in Australia. The group has been delivering good performance despite concerns on its organic growth, and reported 5.6% yoy revenue growth (for its 229 centers-Like for Like growth). Accordingly, the wages and rent expenses grew 1.9% yoy and 3.2% yoy, in line with the estimates. But, center EBIT surged 17% yoy in 1H15, while the EBIT margin rose 200bps to 21.4%. GEM generated a solid underlying revenue growth of 63% on a year over year basis to $118.5 million during the first half of fiscal 2015 (including acquisitions growth). Accordingly, the underlying EBIT margins also surged to 17.7% in 1H15, as compared to 16.5% in 1H14. Underlying EPS soared 60% yoy on a year over year basis during 1H15.

 
Like for Like center EBIT growth for acquisitions by year (Source: Company Reports)
 
Stock Performance: The shares of GEM have been under pressure after it touched its all-time high levels, with the stock delivering a negative year to date returns of 25.1% (as of Sep 21). Investors were concerned on the group’s heavy dependence on acquisitions to deliver growth which might cause funding pressure. Further, the recent acquisition bid loss may make the stock look less attractive to many. However, aspects such as allocation of over $3.5 billion worth of government’s federal budget to childcare, which might lead to an increase in the number of children in GEM’s centers and subsequently drive the group’s price per child revenue and thus the top line, if more parents start working, is not to be forgotten. GEM is also an expert in deriving synergies through acquisitions, which was reflected during the first half year’s EBIT growth. We have been always bullish on this high dividend yield (7.5%) stock, and reiterate our “BUY” recommendation at the current price of $2.98. 


GEM Daily Chart (Source: Thomson Reuters)

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The information given by Kalkine Pty Ltd ABN34 154 808 312 (Australian Financial Services License Number 425376) on this website is general information or advice only.

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