Financial Services

Challenger shares up 10% on raised profit guidance

Thu 21 Apr 22, 2:58pm (AEST)
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Key Points

  • Challenger Life reported its lifeline witnessed a 10% lift in sales to $2.7bn
  • Integration of the bank - a key pillar of Challenger’s diversification strategy - is well advanced
  • Morgans admires the quality of the result, and has a rare 'Add' recommendation on the stock

Challenger Ltd (ASX: CGF) hit a rare vein of market attention to become the best performer on the ASX at noon today after the quarterly result revealed the annuities plodder is on track to deliver a normalised net profit "towards the upper end" of its $430m to 480m guidance.

In addition to confirming guidance, Challenger noted that institutional and retail annuity sales drove the reported growth.

Challenger Life reported that its lifeline had witnessed a 10% lift in sales to $2.7bn.

Challenger Life remained strongly capitalised with a prescribed capital amount (PCA) ratio of 1.65 times, towards the top end of its target range of 1.3 to 1.7 times - the minimum amount set by the Australian Prudential Regulation Authority (APRA).

Challenger CEO Nick Hamilton attributed much of today’s strong quarterly announcement to benefits from the company’s diversification strategy.

“Product innovation remains a key priority and our market-linked annuity reflects our commitment to meeting the needs of more customers,” Hamilton noted.

Highlights from Challenger’s quarterly update include:

  • Life book growth of $500m, up 2.8%, for the quarter

  • Group assets under management (AUM) of $106bn

  • Funds under management (FUM) at $100bn, down -3% for the quarter (ex-derecognition of Whitehelm Capital following its sale) due to a $1.9bn hit to investments and $1.7bn in outflows

  • Outflows were driven by a $1.3bn redemption by an institutional client in a low margin fixed income mandate

  • Domestic retail sales increased 18% to $498m

  • Japanese (MS Primary) annuity sales were $63m

  • Life’s investment assets at 31 March 2022 were $22.4bn, down -2% for the quarter

Upside

The market-linked annuity has now been added to approved product lists of key financial advice businesses and management notes initial feedback and engagement from financial advisers has been positive.

Hamilton envisages significant opportunities in both Australia and offshore for the funds management business and notes the integration of the bank - key pillar of Challenger’s diversification strategy - is well advanced.

Bank deposit sales were $59m and maturities and withdrawals $29m, resulting in net flows of $30m for the quarter, while the bank deposit book growth for the third quarter was 22.4%.

The Bank is preparing to make Challenger’s term deposits available via the broker channel, including Australian Money Market, expected in the fourth quarter of 2022.

“We expect to commence corporate and SME lending shortly, which will support sales growth and margins.”

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Challenger share price today.

What brokers think

Challenger’s share price has soared 31% in the last 12 months, 12% year to date, and 5% in the last month.

The company’s shares appear to be consolidating within a longer-term uptrend, with shares currently above the 200-day moving average, which is rising along with the 10-day moving average.

Based on the brokers that cover Challenger (as reported on by FN Arena), the stock is currently trading with -8.6% downside to the target price of $6.80.

Morgans is alone in its Add recommendation on the stock (target price $7.74), while all other brokers maintain a Hold (or equivalent).

The broker admires the quality of the result, noting solid asset growth in Funds Management and Life business, and support for margins.

While Challenger has upgraded guidance to the upper end of its original range, Citi today notes that maturities are surprisingly elevated for a March quarter, leading to a slower quarter growth rate.

As a result, the broker’s Neutral rating and $7 target price retained.

Consensus on Challenger is Moderate Buy.

Based on Morningstar’s fair value of $7.80, the stock appears to be undervalued.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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