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Why the Challenger Ltd share price could be heading to a record high

The Challenger Ltd (ASX: CGF) share price will be closely watched by investors today after the annuities provider this morning report a profit result marginally ahead of analysts’ expectations.

Below is a summary of the results for the six-month period ending December 31 2016.

  • Normalised net profit after tax of $197 million, up 8%
  • Assets under management of $64.7 billion, up 12%
  • Normalised earnigns per share of 35 cents, up 7%
  • Normalised pre-tax return on equity of 18.7%, up 0.6%
  • Record low cost-to-income ratio of 32.9%
  • Interim dividend of 17 cents per share, up 6%
  • Record annuity sales of $2.2 billion, up 34%
  • Announced new annuities relationship with BT Financial Group

Annuities business

The group’s core business is in the provision of annuities to retirees and the baby boomer generation now hurtling into the retirement phase with total product sales of $2.8 billion for the half. Annuity sales of $2.2 billion were up 34% over the prior half in a strong result that reflects the group’s expanded distribution platforms and powerful tailwinds supporting the business.

In total the annuity group’s cash operating earnings increased 8% to $316 million over the prior corresponding half (pch) as the outlook for this key business remains bright due to its dominant competitive position.

Funds Management Group

Challenger also runs substantial funds management operations and its results were also positive as it delivered net fund inflows of $3.2 billion to take total funds under management (FUM) to $62.1 billion as at 31 December 2016.

Disappointingly though net income for the business slipped to $65 million, versus $67.1 million in the pch as the group suffered marginally from lower performance fees among other factors.

The downside

The other disappointing aspect of the result was that the group posted a statutory net profit after tax of $202 million, down 14% or $33 million from the $234 million delivered in the first half of 2016. The group blamed $25 of the fall on lower after-tax “investment experience” which suggests the valuation of assets and liabilities held by the Life business moved adversely over the period. The group holds assets to match off its long-term liabilities (the annuities) and the adverse impact on the profit and loss line is disappointing, although the group did not offer a specific explanation for the fall.


Still, Challenger remains one of the best financial services businesses available to investors on the ASX and for the full year it expects to deliver cash operating earnings of $620 million to $640 million, compared to $592 million in the prior year.

This would represent some strong growth and with the shares at $11.64 on 16x annualised earnings with an expected fully franked yield of 3% it looks reasonable value given its outlook.

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Motley Fool contributor Tom Richardson owns shares of Challenger Limited.

You can find Tom on Twitter @tommyr345

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.

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