Challenger Ltd (ASX:CGF) reports another year of growth

This morning annuity provider and fund manager Challenger Ltd (ASX: CGF) reported that normalised net profit after tax (NPAT) of $406 million, which was up 6% compared to last year.

Challenger also reported that its total dividends for FY18 would amount to 35.5 cents, with a final dividend of 18 cents per share, fully franked. This represents a 3% increase compared to the FY17 dividend.

The annuity business had guided normalised net profit before tax (NPBT) growth of 8% to 12% for FY18. Challenger delivered at the low end of this guidance hitting 8% growth to $547 million of NPBT.

During the year Challenger brought on board Japanese business MS&AD Insurance Group with a $500 million equity placement which was 6.3% of issued capital. In this result the new shares had the unfortunate impact of causing the normalised earnings per share (EPS) to drop by 1% to 68.1 cents, despite the normalised NPAT growth of 6%. The profit had to be divided amongst more shareholders.

The new shares issued to MS&AD also affected the company’s normalised return on equity (ROE) which fell to 16.5% from 18.3%. Challenger expects the FY19 ROE to increase but may not reach its 18% target. Challenger is shifting its capital to fixed income over property to optimise future ROE.

The final main negative number was that statutory NPAT fell by 19% to $323 million. Challenger attributed this decline to ‘lower investment experience’. As we know as investors, values go up and down. But over the long-term Challenger needs good investment experience to fund paying annuities and make profit for shareholders.

Onto more positive numbers.

Challenger reported funds management net flows of $5.3 billion and its group assets under management (AUM) grew by 16% to $81 billion. Challenger is one of the fastest growing fund managers in Australia.

Total life sales were up 12% to $5.6 billion and the life book saw growth of 37% to $1.8 billion. The company attributed this growth to an increase in diversification and distribution of its products. Challenger was rated as the leader in retirement income by 93% of advisers according to the Marketing Pulse Advisor Study. Challenger’s products started being offered through AMP Limited (ASX: AMP) in September 2017, increasing the number of advisers writing Challenger annuities.

Challenger’s scale is becoming more apparent with the normalised cost to income ratio improving to 32.7% from 33.4% last year. The group normalised earnings before interest and tax (EBIT) margin also rose to 67.3% from 66.6% a year ago.

The business remains strongly capitalised with $1.3 billion of excess regulatory capital. This represents 1.53 times the Prescribed Capital Amount (PCA) set by APRA and is at the top end of Challenger’s target range of 1.3 to 1.6 times.

Challenger is steadily building its capability. In Japan it was granted a real estate licence and insourced management of Life’s Japanese portfolio. Challenger has also launched new strategies for existing boutiques and added two new boutiques.


Challenger remains confident of its future as a growing number of retirees with higher balances will need products to help their increasing lengths of retirement. Challenger’s products will also be offered on more platforms in the coming years.

In the recent budget the Government announced that superannuation funds will be required to offer members Comprehensive Income Products for Retirement. This is in addition to new rules and means testing that supports retirement income products. This should provide a major boost to Challenger over time.

Challenger is guiding that FY19 will deliver NPBT growth of 8% to 12% compared to FY18.

Foolish takeaway

Challenger just scraped into the bottom end of its own 8% to 12% NPBT growth guidance. So, in that regard it is a little disappointing it wasn’t able to reach a mid-point of the range, which most investors were probably expecting.

However, with the total Australian superannuation pool balance expected to double in the next 10 years, the growing retirement population and the new Government rules I imagine that Challenger has a long-term growth runway.

I’ve been a shareholder for a number of years and I expect I will continue holding for at least the next decade to benefit from the ageing tailwinds. I’ll be looking to buy on share price weakness over the next 12 months – particularly if rising interest rates damage the valuation.

Another business that looks like it has excellent growth in store is this top ASX share that is predicting profit growth of 30% this year.

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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 Scott Phillips.

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