Why the Challenger (ASX:CGF) share price is tumbling 6% lower today

The Challenger Ltd (ASX:CGF) share price is tumbling lower on Tuesday following the release of its half year results…

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The Challenger Ltd (ASX: CGF) share price has come under pressure following the release of its half year results.

In morning trade the annuities company’s shares are down 6% to $6.77.

How did Challenger perform in the first half?

For the six months ended 31 December, Challenger reported annuity sales of $2.2 billion and total life sales of $3.4 billion.

While this was a solid 12% and 10% increase, respectively, over the prior corresponding period and a mammoth 87% and 71% increase, respectively, over the second half of FY 2020.

Together with funds management net inflows of $6.4 billion for the half, Challenger ended the period with assets under management of $96 million. This was a 13% lift on the prior corresponding period.

Things weren’t quite as positive for its profits, with Challenger reporting a sizeable (but expected) decrease in half year earnings.

Normalised net profit before tax (NPBT) came in at $196 million, down 30% on the same period last year. This puts in on track to achieve its FY 2021 normalised NPBT guidance of $390 million to $440 million

This ultimately led to profit after tax falling 29% on a normalised basis to $137 million and rising 1% to $223 million on a statutory basis. The latter includes positive investment experience of $87 million.

Finally, Challenger is resuming its dividend payments after a brief hiatus and declared a fully franked interim dividend of 9.5 cents per share.

How does this compare to expectations?

According to a note out of Morgans, it expected the company to reveal that it was tracking in line with its guidance and was forecasting a half year underlying profit before tax of $204 million. Its analysts also pencilled in an interim dividend of 9.8 cents per share.

While Challenger is tracking in line with its guidance, it has fallen short of Morgans’ profit and dividend forecasts for the half.

This appears to be why the Challenger share price is under pressure today.

Outlook

As mentioned above, management expects its normalised net profit before tax in FY 2021 to be in the range of $390 million to $440 million.

It notes that earnings are expected to be weighted to the second half, reflecting the gradual deployment of excess cash and liquid investments over the year.

Managing Director and Chief Executive Officer, Richard Howes, commented: “Our strategy of diversifying revenue is working with strong book growth in our Life business and industry leading organic flows in Funds Management.”

“We remain strongly capitalised with prudent portfolio settings which are appropriate given our growing customer franchise. The investment portfolio is in good shape, with no significant credit defaults and stable property valuations during the half year. We are gradually deploying our excess cash and liquidity to enhance future returns.”

“Challenger enters the second half of the 2021 financial year in good shape, having withstood industry and COVID-19 related disruption of recent years. Our strong performance in funds management, building momentum in annuities, and new opportunities in banking mean Challenger is well placed to achieve our vision of providing customers with financial security for retirement,” he concluded.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. 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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