BUY HOLD SELL – Challenger (ASX: CGF)
In a slowing growth, high inflation, and turbulent macro environment it is difficult to pick stocks. One that has managed to weather those headwinds with relative grace for a few reasons is Challenger (CGF).CGF is an Australian based investment management company with a vision to help its customers achieve financial security for their retirement. Its annuities business is well integrated into the Australian financial landscape. 91% of its revenue comes from its Life segment (annuities), which claims the title of Australia's largest provider of annuities. 9% of its revenue is attributed to its Funds Management segment which has more than $100bn under its stewardship. It also operates a banking segment which it acquired at the end of 2020 and is expected to start ramping up lending to SMEs and certain non-retail entities in the fourth quarter of 2022. Challenger recently upgraded profit guidance citing benefits from its diversification strategy which included a jump in institutional and retail annuity sales. Now sees FY22 normalised net profit before tax towards the upper end of its $430m to $480m guidance range. To put the upgrade into context, this time last year CGF actually downgraded guidance due to shrinking credit spreads. Exactly the opposite of what is happening now. The major tailwind for the business at the moment is the shift in monetary policy and the outlook for higher interest rates. The attractiveness of its annuity products improves in a higher interest rate environment as the yield they can offer on their annuity products also improves. On May 5, Challenger’s three-year term annuity will earn customers 3.75% guaranteed, which compares to 1.4% a year ago. The other slow-burn driver for the business is the aging population in Australia and Japan. Its partnership with MS Primary allows the firm to sell Australian and USD-denominated annuities in Japan. The ‘latest’ research from the ABS which is a little dated (8/05/2020) revealed 500,000 Australians intended to retire in the next five years and they all need some form of income. In Japan, which is described as having a ‘super aging’ population, that figure is much higher.
- ROE of 9.1% is expected to remain relatively stable for the next few periods. Against its peers, Suncorp (SUN) sits on 7.2%.
- EPS growth is anticipated to outpace revenue growth this year and for the foreseeable future.
- CGF sits on a PE of 17.5x, SUN sits on 16.7x so it is slightly more expensive of the two.
- A gross yield of 4.5% is solid but behind SUN which offers 7.2%. Both fully franked.