The ASX financial company Challenger Ltd (ASX: CGF) has seen its share price fall by around 9% in the past week, and it's down more than 25% from August 2024. Not since mid-2021 has the ASX 200 annuity stock been as low as this.
While a low share price doesn't necessarily equate to great value, in this case, I think the lower Challenger share price could represent a buying opportunity for investors.
Interest rates have fallen slightly in Australia, but remain high enough to help annuities appeal to prospective customers who are looking for guaranteed income on their capital.
After seeing the company's result, where normalised net profit after tax (NPAT) grew 12% to $225 million, and the interim dividend was hiked by 12% to 14.5 cents per share, broker UBS called Challenger shares a buy. Let's look at why the broker is bullish on this ASX 200 stock.
Positive view on the ASX 200 stock
UBS said that expectations of higher margins were met with disappointment even though an improving sales mix "should have provided some positive ballast" (stability).
The broker said some one-offs drove a miss on the product margin, resulting in a deferral of the expected margin expansion story.
Despite that, Challenger was able to exceed its group return on equity (ROE) targets for the first time since 2017, which was assisted by a "strong cost result", according to UBS.
The broker also noted that with strong second-quarter sales and the improving prospect of Challenger's annuity book, UBS remained "upbeat" on the ASX 200 stock going forward considering "potential regulatory tailwinds on both product and capital."
UBS said the business trades at an "undemanding" price-to-earnings (P/E) ratio of less than 9x, which it sees as "compelling value".
Despite that, UBS did modestly reduce its forecast for the normalised net profit by 2.6% to $450 million, compared to guidance of between $440 million and $480 million.
The broker also forecasts Challenger could pay an annual dividend per share of 29 cents in FY25.
UBS predicts further growth for the ASX 200 stock in the future, highlighting that in FY26 it could generate net profit of $479 million and pay an annual dividend per share of 31 cents.
So, despite the forecast of growing earnings and dividends, the market is attributing a forward earnings multiple of less than 10, which may appear low in time.
Challenger share price snapshot
Since the start of 2025, the Challenger share price has dropped by around 8%.
