Challenger Ltd (ASX: CGF) shares have been out of form in recent months.
So much so, the ASX 200 stock has pulled back 20% from its 52-week high.
This has caught the attention of analysts at Goldman Sachs, which believe that it could have created a buying opportunity for investors.
What is Goldman saying about this ASX 200 stock?
According to a note out of the investment bank this morning, its analysts believe that this pullback has unjustified and dragged the annuities company's shares to an attractive level. Particularly given its improving return on equity (ROE).
Commenting on its de-rating, the broker said:
Valuation appeal noting improved earnings / ROE while valuation has derated: CGF's 1-year forward P/E has fallen to ~10x against a backdrop of improving normalised ROE toward target in FY25 and COE margin (without material normalised capital returns) and improved normalised earnings.
Goldman also highlights that the ASX 200 stock's capital position remains strong. It adds:
We expect 1H25 capital position to be strong and broadly stable from 1Q25 perhaps ~1.6x vs. target of 1.3-1.7x: This can help fund earnings growth into 2H25 and FY26 through book growth / asset risk up; offsetting the impact of lower cash rates. On MTMs, we note slightly negative asset experience, NB strain as well as negative illiquidity premium and life risk liability movements (FX). Combined with the dividend payment, we expect this to offset normalised NPAT resulting in a stable capital position.
Big returns
The broker is expecting some big returns from the ASX 200 over the next 12 months.
This morning, Goldman has retained its buy rating with a trimmed price target of $7.60. Based on its current share price of $6.02, this implies potential upside of 26% for investors over the next 12 months.
In addition, the broker is forecasting dividend yields of 4.4% in FY 2025 and then 4.6% in FY 2026. This brings the total potential 12-month return to over 30% for investors.
Commenting on its buy recommendation, the broker said:
We are Buy rated on the stock. We like CGF because: 1) it has exposure to the superannuation market across Life and Funds Management; 2) Yields are supportive of a favorable sales environment for retail annuities; 3) annuity book growth looks well-supported through a diversified distribution strategy / capital position.
Downside risks: 1) Post tax statutory ROE, which has been lagging normalized ROEs, which in turn has been lagging targets (but expected to be met in FY25); 2) weak fund management flows; 3) exposure to property, alternatives and fixed income credit spreads in an uncertain economic environment which can impact capital.
