Challenger Ltd (ASX: CGF) shares have been on a roll this year, rising 34% for the year to date.
That's significantly ahead of the S&P/ASX 200 Index (ASX: XJO), up nearly 5% over the same period.
Challenger is an investment management company that provides financial security for retirement. It operates two core investment businesses, an Australian Prudential Regulation Authority (APRA)-regulated Life division, and a fiduciary Funds Management division. Challenger Life Company Limited (Challenger Life) is Australia's largest provider of annuities.
Challenger shares were among the best-performing stocks in April.
The share price got a boost on the back of news that TAL Dai-ichi Life Australia agreed to acquire a 15.1% minority interest from MS&AD Insurance Group Holdings. TAL paid 763 yen per Challenger share (the equivalent of A$8.46 per share), which was a 52.7% premium to its last close price.
In June, a key regulatory initiative was also announced.
APRA initiated a regulatory consultation regarding capital settings for annuity products offered by companies such as Challenger.
While Challenger shares fell 3% that day, management believes it is an important reform.
Looking further out, Challenger shares have been a lucrative investment for shareholders over the past 12 months, rising 19%.
But what will the next 12 months look like? Have Challenger shares peaked?
Let's see what one expert had to say.
Image source: Getty Images
Macquarie expects Challenger to outperform
In an 8 July research note, Macquarie Group Ltd (ASX: MQG) reiterated its outperform rating on the stock.
The broker has set a 12-month price target of $9.30. Given that shares are changing hands for $8.01 at the time of writing, that suggests a 20% upside over the next year, including both capital gains and dividends.
When affirming its recommendation and price target, Macquarie said:
In 4Q25, we estimate credit spreads (simple average of A and BBB rating) for CGF's portfolio mix, increased by ~13bps (i.e. decreasing investment yields). We remind that changes in credit and annuity spreads only affect new business.
The premium of CGF's annuity rates on 3yr and 5yr tenors vs major bank deposit rates contracted ~9bps, decreasing the "relative" value proposition.
We incorporate a $750m buyback into our forecasts commencing 1H27 recognising the proposed new capital standards for Life insurers in Australia.
The broker also commented on the regulatory reform initiative announced in June.
According to Macquarie, APRA is attempting to "lessen the capital impost on Life insurers, which is currently acting as a deterrent for new entrants", and "change the risk sensitivities which require providers to liquidate assets during market downturns".
Valuation
On the subject of valuation, Macquarie noted that Challenger shares were currently trading on a 12-month forward price-to-earnings (P/E) ratio of 12.8, which is above its 3-year average of 11.9. The broker added that this translates into a 35% discount to the ASX100, compared with the 3-year average valuation discount of 24%.
So, while Challenger shares are trading above their historical premium, they are relatively more attractive than the broader market, which has become significantly more expensive.
Challenger will release its full-year FY25 financial results on 19 August. Stay tuned.
