The Challenger Ltd (ASX: CGF) share price jumped 6.5% yesterday after reporting its FY24 result. Investors loved the ASX financial share's report which showed good growth. After such good numbers, it's worth asking if the annuity provider is a buy.
A business can still be good value even if it goes up in price because the reported numbers may have demonstrated that the current share price still doesn't reflect how good the outlook truly is.
The business reported a number of positives, which may bode well for FY25 (and beyond).
Let's run through some of the highlights before considering if it's a buy.
Positive result recap
The company reported that it generated normalised net profit before tax (NPBT) of $608 million, up 17%.
Challenger's group assets under management (AUM) grew by 21% to $127 billion, partly thanks to life sales of $9.1 billion, with lifetime annuity sales of $1.5 billion (up 110%).
Normalised earnings per share (EPS) grew by 14% to 60.9 cents per share. The normalised return on equity (ROE) was 15.6%, up 290 basis points (2.90%) – Challenger said it's on track to achieve its ROE target in FY25. The ROE target is the RBA cash rate plus a margin of 12%.
The board of Challenger decided to lift the full-year dividend by 10% to 26.5 cents per share.
However, the company did report that its statutory net profit after tax (NPAT) declined 24% to $130 million. This number included the unrealised impact of lower commercial property valuations and changes to the UK mortality rate assumptions.
The broker UBS said that earnings beat market expectations and were ahead of the guidance range, and the dividend was stronger than expected, which helped the Challenger share price rise. However, the statutory net profit was "surprisingly low due to very large investment experience loss". Despite that, the balance sheet strength improved.
UBS suggested there were some question marks on the company's capital position.
Is the Challenger share price a buy?
The outlook for the business seems positive, in my opinion, though I'm wary that eventual lowering interest rates may make annuities seem a little less appealing to retirees if they lead to lower payment rates.
The broker believes the FY24 result "went a long way to addressing market concerns for life margins, capital and business quality". Cost control was a "key feature", and it sees "further earnings upside from this source".
UBS suggested that Challenger's guidance appears to be conservative, with the broker forecasting a net profit before tax of $695 million. Challenger's guidance for normalised NPBT is between $640 million and $700 million.
The broker rates Challenger shares as a buy and increased its price target to $8.30. That implies a possible rise of around 13% from today's level.
Challenger is guiding normalised net profit after tax will be between $440 million to $480 million. UBS is forecasting NPAT of $487 million in FY25 and $561 million in FY26.
The broker is also suggesting the annual dividend per share could rise to 31 cents per share in FY25 and 35 cents per share in FY26. The FY25 dividend could translate into a grossed-up dividend yield of around 6%.
