CHALLENGER LIMITED (ASX: CGF)

Macro headwinds: Challenger, the market leader in retirement income with 68 per cent of its share in annuity market, seems to be facing some challenges at the back of regulatory changes expected to come in force in 2018, which may impact its annuities products.Particularly, its Liquid Lifetime product has been indicated to witness a sale slip from 2019 at the back of expected softness in the segment targeting annuity for social security benefits as the Department of Social Security has recently flagged new means-test rules for lifetime retirement income products such as annuities. While the rules are yet to be implemented; if brought in force, can change the landscape of retirement products. At the moment, a lot hinges on selecting between annuities style investing or shares where franking benefits now have gone for a toss basis labor party’s indication of franking credit crackdown.

Mixed Financial Performance: Group’s Statutory net profit after tax for 1HFY18 was $195m and was $13m lower than the normalised net profit after tax as it included the impact of valuation changes on the Group’s assets and liabilities.A fully franked interim dividend of 17.5 cents per share was declared and was 3 per cent higher than the last year and represented around 50 per cent of normalised net profits after tax. Statutory EPS was down by 8 per cent as compared to same period in the prior year; and normalised return on equity was 16.8 per cent (pre-tax), which was down by 190 bps as compared to 1HFY17. The Group now targets to achieve 18 per cent of ROE (pre-tax) over the medium term. Over the last decade, Challenger’s normalised cost to income ratio has fallen by 13 percentage points and is 17 percentage points below the industry average. In the past three months, share prices declined by 12.8 per cent and by 2.7% in last five days (as at March 16, 2018). On the other hand, UBS Group AG and its related bodies corporate became the substantial holder of Challenger Limited by holding 31,931,584 shares with 5.23 per cent of the voting power (as at March 01, 2018). While the impact from evolving macro trends is yet to be ascertained and the financial performance has also been a bit modest, we maintain our “Expensive” recommendation at the current market price of $11.99
 

Net Profit Trend (Source: Company Reports)

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