The Challenger Ltd (ASX: CGF) share price has been doing well in recent months, I'm going to explain why I think that can continue.
Over the last year, the annuity provider has risen by more than 20%.
The company's updates have been exciting investors with strong annuity sales growth numbers.
In the first quarter of FY23, total life sales increased by 33% to $2.8 billion, while annuity sales jumped 50% to $1.8 billion.
I think there are two key reasons why Challenger is now a much more compelling investment to consider.
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Interest rates normalised
The idea behind Challenger's offering of annuities is that it enables people to swap their capital for a guaranteed source of income.
When interest rates kept reducing, it made the yield on offer reduce and seem less appealing. For example, in 2021, its 3-year annuity return on offer was 1.85%.
But, now that interest rates have gone up, people can get much more appealing annuity rates. They're able to lock in a much better return. I think this is promising for the Challenger share price.
When the company announced its FY23 first quarter, the Challenger managing director and CEO Nick Hamilton said:
Annuity sales are benefiting from the interest rate environment, which has improved the customer proposition. Our 3-year annuity rate reached 4.85% in October, the highest level in the last ten years. We are seeing a significant pick up in quote levels from advisers and we are attracting new customers.
Pleasingly, the higher interest rate environment is providing us the opportunity to remix our sales. Annuity sales greater than two years, including lifetime sales, are increasing, reflecting our focus on growing longer duration business.
We are well placed to continue our growth trajectory, with the interest rate environment supportive for the business and achieving our purpose of helping customers achieve financial security for retirement.
With those strong fund inflows, the business is expecting to achieve normalised net profit before tax of between $485 million to $535 million in FY23.
I think it's also worth pointing out that the ageing demographics of Australia give the business strong tailwinds for the coming years as the baby boomer generation moves from the accumulation phase to the retirement phase with their money, though that's not all going to play out in 2023.
Asset falls finished?
Challenger manages an enormous amount of assets. At the end of the FY23 first quarter, it had $96 billion of assets under management (AUM). The more this figure can grow from asset price growth, the better it is for Challenger and shareholders.
Rising interest rates have been rough on asset values over the past 12 months. But, I think that's just a temporary setback.
Over the long term, assets like shares have risen in value. Once interest rates stop rising, I think this will be a real positive for Challenger's asset base, while still benefiting from the improved environment for annuity demand.
Challenger share price valuation
According to the forecasts on Commsec, the business is currently valued at 15 times FY23's estimated earnings.
