Now could be the time to load up on Challenger Ltd (ASX: CGF) shares.
That's the view of analysts at Bell Potter, which have just initiated coverage on the ASX 200 share.
What is the broker saying about this ASX 200 share?
Bell Potter believes that the annuities company is well-placed to benefit from Australia's ageing population. It said:
CGF is focused on providing financial security for retirement. It is therefore well placed for an ageing population, with products for those accumulating in the approach to retirement, and those decumulating in retirement. This is supported by the growth in the superannuation system, which is expected to grow from $3.9trn currently to $11trn over the next 20 years.
Big return potential
In light of its positive outlook and attractive valuation, the broker has initiated coverage on the ASX 200 stock with a buy rating and $8.25 price target.
Based on the latest Challenger share price of $6.25, this implies potential upside of 32% for investors over the next 12 months.
In addition, its analysts are forecasting fully franked dividend yields of 4.8% in FY 2025 and 5.1% in FY 2026. This stretches the total potential 12-month return to almost 37%.
Bell Potter explained that there are five key points backing up its buy recommendation. It said:
Our buy case is predicated the recent increase in sales of lifetime annuities and resultant stronger growth in the life book. We make the following five points.
1/ We believe the most important products that CGF writes are lifetime annuities. 2/ Precovid, lifetime annuities sales averaged over $200m per quarter and represented about 20% of life sales. As a result, net flows into the life book ran at over 10% per year. 3/ in FY20, the impact of Covid-19 and low interest rates reduced the attraction of lifetime annuities and sales averaged $120m per quarter, and net flows slowed to low single digit.
4/ In FY21 and FY22 CGF grew by selling shorter term annuities, although as these matured after 1-2 years, the growth of the book slowed back down to mid-single digit. 5/ Lifetime sales picked up in 2023 and are running above $200m per quarter, rising to $275m in Q1 FY25. We estimate that the market is expecting the life book to continue to grow at mid-single digits, but as lifetime annuity sales pick up, we believe the book will revert to growing at high-single or low-double digit.
