Challenger Ltd just reported even more growth

Challenger Ltd (ASX: CGF) has just reported its result for the six months to 31 December 2017.

Challenger is Australia’s leading annuity provider with a dominant market share, below are highlights of its results compared to the prior corresponding period.

The headline figure for Challenger is that group assets under management (AUM) increased by 18% to $76.5 billion. Life AUM increased by 17% and funds under management (FUM) increased by 18%.

Challenger removes the investment performance of its assets and liabilities to produce ‘normalised’ profit figures.

Normalised net profit before tax (NPBT) increased by 8%, it increased by 13% if the one-off Life Risk fee is excluded. Normalised net profit after tax (NPAT) increased by 6%, it increased by 10% if the one-off Life Risk fee is excluded. The higher effective tax rate hurt the NPAT figure.

The statutory NPAT decreased by 3% due to the negative investment experience of $17 million.

Normalised pre-tax return on equity (ROE) dipped to 16.8% and was below the 18% target. However, Challenger said this was expected as it currently has higher levels of capital after the MS&AD placement in August 2017.

The AUM and normalised profit growth figures were driven up by the ever-increasing annuity sales. ‘Life’ sales were up 21% to $3.3 billion, annuity sales were up 4% and ‘Other Life’ sales were up 84% to $1 billion.

Long-term annuity sales were up 20%, which represents ‘Lifetime’ and MS Primary annuities. Long-term annuity sales made up 36% of total annuity sales, Lifetime represented 19% of annuity sales and MS Primary represented 17%.

The dividend increased by 3% to 17.5 cents per share and is fully franked. The dividend payout ratio is 49.7% and the overall cash payout is expected to be reduced by 2% due to the dividend re-investment plan.


Challenger re-iterated its FY18 profit guidance of normalised net profit before tax of between $545 million to $565 million, which represents growth of between 8% to 12%.

The company expects to achieve its 18% return on equity target in the medium-term, but FY18 (and perhaps beyond) will be impacted until the higher levels of capital are fully deployed.

Management will maintain the normalised NPAT dividend payout ratio of 45% to 50%.

Foolish takeaway

Overall, I thought this was a solid result from Challenger. The moves it’s making to increase its distribution channels should help long-term profit and profit margins because of how scalable the business is.

The fall in statutory profit was slightly disappointing with almost all asset prices at all-time or multi-year highs at the end of December. As long as Challenger’s long-term investment experience shows growth then it’s not an issue.

Personally, I was pleased with Challenger’s result and I’m glad that it’s one of my biggest holdings. I will likely buy more shares if any opportunities present themselves to buy more at a discounted price if market volatility hurts the share price.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. 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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