Why this ASX 100 stock can rise 14% to a new 52-week high

Goldman Sachs thinks investors should be buying this top stock now.

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Challenger Ltd (ASX: CGF) shares are having a tough finish to the week.

At the time of writing, the ASX 100 stock is down over 3% to $6.60.

This appears to have been driven by a combination of broad market weakness and profit-taking after a strong gain on Thursday following the release of a trading update.

Speaking of the latter, during the third quarter, Challenger reported total Life sales of $1.7 billion and Life book growth of 0.9%.

It also revealed that lifetime annuity sales were up 37% for the period to $202 million and that its assets under management (AUM) reached $124 billion. This means that its AUM rose by a solid 6% for the quarter.

Thanks to this strong quarterly performance, management now expects its normalised net profit before tax to be at the top end of its $555 million to $605 million guidance range in FY 2024.

Where next for this ASX 100 stock?

The team at Goldman Sachs was pleased with the trading update and guidance upgrade. The broker said:

Guidance was upgraded from "top half of guidance range of $555 to $605m i.e. implying ~$593m at midpoint to "top end of guidance range" suggesting closer to $605m which implies 2H24 of ~$315m at top end noting 1H24 at $290m. We think this is driven by improved contribution from FM + improving COE margins into 2H24 from product cash margin (extending duration) as well as contribution from cash rates on SH net assets + better expenses.

In light of this, the broker believes that Challenger shares are great value at current levels.

As a result, it has reiterated its buy rating and $7.50 price target on the company's shares. This implies a potential upside of approximately 14% for investors and would mean a new 52-week high.

The broker is also expecting reasonably attractive dividend yields from the ASX 100 stock in the coming years. Goldman is forecasting yields of 3.8% in FY 2024, 4% in FY 2025, and then 4.1% in FY 2026.

This increases the total potential 12-month return to approximately 18% for investors buying at today's price.

Five reasons to invest

Goldman has named five key reasons why it thinks investors should buy this ASX 100 stock. It explains:

We remain Buy rated with a 12-m PT of $7.50. We make earnings upgrades to reflect FM performance and slightly higher margin on CGF's annuity book. 1) FY25 earnings growth we think could be driven by FM, cost out and book growth with flattish to slightly higher margin (cash rate cuts offsetting product cash margin improvement). 2) We expect COE margins to improve to 3.15% into 2H24. 3) CGF expects to reach its ROE target over the near term. Depending on cash rate movements & target – we think CGF may get close in FY25. 4) Valuation not demanding at ~11.5x with normalised earnings visibility into FY25. 5) Capital position expected to be managed around 1.5x – albeit possible further pressure on property with flexibility on AA + bank sale proceeds.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has recommended Challenger. 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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