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Challenger Ltd half-year underlying net profit up 10%

Investment management company Challenger Ltd (ASX: CGF) announced a half-year 10% increase in normalised underlying profit to $163.5 million and a 27% increase in its funds under management (FUM) to $45 billion, making it the seventh-largest fund manager in Australia.

The company reported that it is seeing strong business in its annuities and investments and the increasing demographic of retiring baby boomers will provide future growth as people seek new ways to save for retirement in conjunction with superannuation.

CEO Brian Benari said: “Annuity sales are being propelled by product innovation and the rising tide of baby boomer retirees, while our funds under management are growing in line with strong boutique performance and mandated superannuation flows.”

Normalised interim earnings per share were 14% higher to 31.8 cents per share and the interim dividend rose to 12.5 cps unfranked, up 32%.

H1 2012 experienced substantial fair value gains from adjustments to assets and liabilities, which resulted in a much higher statutory NPAT for ordinary equity holders of $222 million. In H1 2013, the adjustments were much lower, so statutory NPAT for ordinary equity holders was $166.3 million, down 25.1%.

Past Performance

Over the past five years underlying NPAT has risen a compound annual 8.8% from $231.3 million to $353 million in 2012. In 2013, return on equity was 15.84%. In FY2013, 82% of its revenue came from its Life division that provides annuities and guaranteed retirement income solutions. Annuities pay out a certain amount over a specified period for an initial lump sum.

They are growing in popularity as people want more control and diversity in their retirement funds. Annuities can work together with superannuation, sparking the recent increased interest by customers.

The funds management division took in about $34.1 million in normalised EBIT on $99.4 million in revenue in 2013. With the rise in FUM, increasingly revenue from the division will grow as the company gets fees for administration, which can be based on a percentage of funds.

Foolish takeaway

Investment and retirement management services companies will see growth as the amount of superannuation that workers contribute to their funds climbs. Self-managed super funds are becoming very popular and Challenger is developing new products that have annuity-style products that work with and abide by the strict rules of SMSFs.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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