Challenger Ltd (ASX: CGF) is an investment management firm and Australia’s largest provider of annuities. Challenger Life provides income to 60,000 investors through its management of $13.2 billion in assets.

Challenger has given shareholders an average annual total return of 25% over the last three years. With all the potential growth on offer, there’s every chance that Challenger can continue giving shareholders a reason to smile. It revealed strong sales growth in its latest report as annuity sales increased by 22% compared to the previous year. In the second half of the 2016 financial year annuity sales increased by 45% from the prior corresponding period.

Challenger managed to increase its annuity sales so strongly because of the increasing number of investment platforms that its products are being offered on. In the 2016 financial year Challenger benefited from VicSuper and Colonial First State (Australia’s largest retail platform) offering its product.

Annuities are becoming more popular for people who want a secure and stable income in retirement. Australia has a low allocation to fixed income and bonds at only 9%. The OECD average is 52%, so there is plenty of scope for Challenger to manage a larger share of Australia’s retirement assets.

Financial planners are increasing their recommendations of Challenger annuities to their clients, Challenger is also building brand awareness directly with consumers too. Sixty percent of consumers now recognise the Challenger brand.

Legislation

There are also potential regulatory tailwinds heading Challenger’s way. David Murray, the chairman of the recent Financial System Inquiry, recommended that super funds should offer members a pre-selected ‘Comprehensive Income Product for Retirement’.

He also recommended removing the impediments to retirement income product development. Essentially, he’s suggesting the government legislate for super funds to work with annuity companies like Challenger, to provide a seamless transition to secure retirement income from super. If this happens, Challenger will really benefit, as it is currently the clear market leader.

Demographics

With most of Challenger’s annuity sales being made to 65 to 70-year olds, there is a demographic tailwind for Challenger. The baby boomer generation are just hitting the annuity-buying sweet spot, so Challenger can expect another 15 to 20 years of strong annuity sales.

Superannuation growth

Australia’s superannuation system is one of the strongest in the world. Our total superannuation pool is growing at twice the speed of the global pension market and we already have the fifth-largest pension market at around $2 trillion with only 24 million people. That’s expected to double to $4 trillion in 10 years and quintuple to $10 trillion in 20 years. This will be boosted even further when the superannuation guarantee contribution rate increases from the current 9.5% to the planned 12% in 2025.

If Challenger can sustain its dominant market share in the annuity sector and the government legislates for income products in retirement, it could lead to substantial growth upon growth.

Challenger is still fairly small compared to some of the financial heavyweights in Australia like the big four banks, AMP Limited (ASX: AMP) and Macquarie Group Ltd (ASX: MQG). Potentially any of these could become major competitors to Challenger. The big banks would have to offer decently priced products to compete, although they aren’t known for good value in the superannuation fund space. So far, Challenger is the only real player in the game.

Is this a good time to buy?

Challenger shares are currently trading at all-time highs of $10.45, having risen 41.9% over the past 12 months. They currently have a grossed up dividend yield of 4.44%.

Its shares are trading at 17x current year earnings, which is a discount to the sector’s 18.5x earnings. Earnings per share are forecast to grow from 59.9cps in FY16 to 71.4cps in FY18 (source:Commsec). This suggests that Challenger is trading at 14.6x FY18 earnings.

I believe the current price can easily be justified by the potential growth in the coming years, particularly if the possible legislative changes occur. However, there may be an opportunity to pick up shares cheaper in the months to come.

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Motley Fool contributor Tristan Harrison owns shares in Challenger Ltd.  The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.