Here’s why Challenger Ltd is well priced for long-term gains

Few Australian-listed companies are better placed to capitalise on the ageing of the Australian population than growing annuities and funds management business Challenger Ltd (ASX: CGF).

Closely documented is the fact that over the next 20 years the proportional rate of Australians above the age of 65 will increase by 75%, and the proportional rate of those above 75 will double. Challenger’s average new annuity customer is 67 years old.

But it’s not enough for a business to merely be situated in a growing sector — even if post-retirement assets over the next 10 years are projected to increase by 400%. Successful companies also need to capture market share. To date Challenger has achieved just that, both in post-retirement annuities and in pre-retirement funds management.

Over the last six years, Challenger’s annuity sales have increased by 560% from $500 million to $2.8 billion. Its annuity customers tend to be sticky too, with a re-investment rate greater than 80%, and an average number of reinvestments per annuity of 2.2 times.

98% of Challenger’s annuity sales are generated from financial advisers, and Challenger will benefit from its high regard in the industry: in December 2013 it was rated the leader in retirement incomes, according to a Marketing Pulse Adviser Study.

Indeed, marketing plays an important part in generating new business and in fostering product awareness. Challenger is making its mark in this area too, winning 2014 Money Management Advertising Campaign of the Year,and securing 10 advertising awards in the last four years.

Challenger’s fund management business is also steadily growing, helped by the acquisition of five new boutique investment managers in 2013-2014. Funds under management stand at $50 billion, taking Challenger to seventh among Australian fund managers in terms of size. It is also one of Australia’s fastest growing fund managers.

Challenger’s funds are also high performing, with 95% of its Fidante fund managers outperforming their respective benchmarks since inception.

Growth opportunities lie in new online platforms that will enable Challenger’s annuity products to be managed like other existing superannuation and investment products. It is also planning to enter the lucrative self-managed superannuation business.

Five-year returns on equity (ROE) remain above 17%, and in line with Challenger’s 18% ROE before-tax targets. Debt-to-equity of 246% is on high side, but not far out of line with its peer group. It is also currently undertaking a $340 million capital raising to fund future projects. Priced at 11-times trailing earnings, it looks undervalued on current metrics.

Past performance is not an indicator of future performance; however, if Challenger can continue to manage the business as it has in its recent past, shareholders stand to be handsomely rewarded.

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Motley Fool contributor Jarrod Fitch owns shares in Challenger Ltd.

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