Challenger Limited

CGF Details

Key Business Updates: Challenger Limited (ASX: CGF) is an investment management firm that provides retirement services to clients by investing in the global equity markets.

CGF Relinquish Stakes in Whitehelm Capital: As announced on 13 September 2021, CGF entered into an agreement with PATRIZIA AG to relinquish a 30% equity stake in Whitehelm Capital at EUR32 million. Following completion, the CGF will derecognise $5 billion of funds under management (FUM) and record circa $44 million gain on the sale.

Q1FY21 Performance Updates:

Key Highlights: During the period, CGF’s assets under management surged by 3% and were registered at $113 million. Life sales edged up by 32%, with 3.4% Life book growth in the quarter. FUM inclined by 2%, incorporating $1.4 billion of net flows.

Challenger Life Continues to be Clear Leader: Total life net inflows stood at $594 million. Annuity sales stood at $1.2 billion, stood stable and included resilient growth in domestic annuity sales. Domestic term annuity sales edged up by 39% to $885 million.

Funds Management Business Embarking Fastest Growth: FUM growth was primarily driven by $1.4 billion net inflows for the quarter, a $0.5 billion net distributions and a $1.7 billion contribution from investment markets.

Encroaching Digital Banking Space: The completed acquisition of MyLifeMyFinance Limited (MLMF), involved in the digital banking domain, remains a key pillar of CGF’s growth strategy.

FY21 Financial Performance

FY21 Financial Snapshot; Analysis by Kalkine Group

Key Risks

CGF’s normalised NPBT declined by 22% due to operations in a defensive setting. Any further market uncertainties and risks may further drive the portfolio in defensive settings. Considerable investment in illiquid assets may cause high market impact costs during redemptions and acquisitions.

Outlook

In FY22, CGF expects to strive for robust profitability and reaffirms its FY22 guidance for a normalised net profit before tax (NPBT) of $430 million - $480 million. Normalised pre-tax ROE is estimated at RBA cash drag plus a 12% margin. CLC excess regulatory capital remains strongly capitalised to operate around 1.60x PCA.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock’s historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation

The stock of CGF gave a positive return of ~42.521% in the past one year. The stock is currently trading higher than the 52-weeks’ average price level band of $4.480 - $7.370. The stock has a resistance level at ~$6.76 and support at ~$5.70. The stock has been valued using the price to book value multiple-based illustrative relative valuation method and arrived at a target price low single-digit downside (in percentage terms). The company might trade at a slight discount to its peers’ average P/B (NTM trading multiple), considering deterioration in NPBT, and prolonged operations in defensive settings. For valuation, few peers like AMP Ltd (ASX: AMP), Earlypay Ltd (ASX: EPY), Eclipx Group Ltd (ASX: ECX) have been considered. Considering the current market conditions, prolonged defensive settings, high cash drag, and equity market volatilities, recent rally in stock prices, current trading levels, key risks associated with the business, and downside indicated by valuation, we suggest investors to book profits and give a “Sell” recommendation on the stock at the market price of $6.75, as of 19 October 2021, as at 11:20 AM (GMT+10), Sydney, Eastern Australia.

CGF Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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