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Why the Challenger share price jumped 13% today

Retirement

Annuity provider Challenger Ltd (ASX: CGF) reported its half-year result to 31 December 2019 today, causing the share price to jump 13%.

Challenger has been through a rough time over the past year with Australia’s falling interest rate and the financial services royal commission which caused disruption to the financial advice sector.

Challenger’s pleasing numbers

Challenger reported that group assets under management (AUM) rose 10% to $86 billion.

Normalised net profit before tax was up 3% to $279 million, though normalised net profit after tax (NPAT) dropped 4% to $191 million.

What does “normalised” net profit mean? It’s Challenger’s profit measure which it thinks better reflects the underlying operating performance of the business. The normalised profit figures exclude investment experience and significant items. The ‘investment experience’ compares the actual investment returns against Challenger’s long-term assumptions for investment returns as well as any impact of changes in economic variables and assumptions used to value liabilities.

Looking at some of the other numbers, Challenger’s statutory profit rose by $214 million to $220 million and it achieved a normalised return on equity (ROE) of 15.2% which was 0.30% above target.

Total life sales were up 15% to $3.1 billion thanks to Challenger’s Japanese partnership and Australian institutional sales, offset by lower domestic sales because of industry disruption.

Total annuity sales were down 9% ($0.2 billion) to $2 billion. Other Life sales were up 97% to $1.2 billion which showed strong demand from institutional clients who want guaranteed returns in this low interest rate environment.

Challenger had excess regulatory capital and group cash of $1.5 billion, up $0.1 billion.

Challenger dividend

The Challenger board decided to maintain the interim dividend at 17.5 cents per share.

Challenger’s current focus

Challenger is focusing on supporting more direct engagement with prospective customers, increasing support to advisers to better meet changing customer needs and expanding its capabilities to partner with institutional clients.

Challenger outlook

Challenger is expecting that its FY20 normalised net profit before tax is expected to be around the top end of Challenger’s guidance range of $500 million to $550 million. It’s also on track to achieve its normalised ROE target of the RBA cash rate plus a margin of 14%.

The full year dividend is expected to remain unchanged from FY19 with a full year payment of 35.5 cents per share, which is above the target dividend payout ratio of 45% to 50% of normalised profit after tax, reflecting Challenger’s strong capital position and confidence in future growth.

Foolish takeaway

Given the operating environment, this was a solid result by Challenger and it has restored a lot of sentiment about the medium-term outlook. It has an attractive long-term future, though I am still a bit wary about changing interest rates.

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Returns as of 6th October 2020

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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