This morning shares of annuity provider and fund manager, Challenger Ltd (ASX: CGF) have dropped over 3.5% following the release of its half-yearly results.
Although profit fell by 21% on a statutory basis in the six months to 31 December 2014, operationally the business is firing on all cylinders with record growth in the annuities business and very strong inflows for the funds management division.
Total annuity sales of $2.1 billion during the period take the total managed annuity fund to a whopping $12.4 billion, whilst funds under management grew by 17% to $55.2 billion with much of the funds going into fixed income and commercial property – clearly a reaction by many investors to the low interest rate environment.
Commenting on the results CEO, Brian Benari, said: “Pre-tax earnings continue to grow at a pleasing rate despite a backdrop of market volatility and a declining risk-free rate. Fortunately, the uncertain market environment has also been a driver of strong fixed income fund flows and record retail annuity sales, with retirees valuing the attractive risk-adjusted returns of capital-backed, guaranteed annuities.”
Statutory profit shouldn’t be ignored, but investors should look beyond this headline number and focused on the underlying business. In Challenger’s case, it’s important to look at normalised profits as well, which excludes some numbers created by accounting rules and other factors. Indeed, Challenger’s normalised profit after tax declined just 5.3%, which was largely a result of a $49.8 million tax bill.
An interim dividend of 14.5 cents per share was declared, with 70% franking, a 16% increase.
Should you buy, hold, or sell Challenger?
Challenger stands at the beginning of what is likely to be a very long growth runway. Whilst earnings may be lumpy from year to year – particularly given its heavy push into the cyclical funds management industry – today’s results bode well for investors over coming years.
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