The prospect of Challenger receiving a full bid from Apollo is receding as both parties seem happy to act more like partners. This could be very good news for CGF if Apollo really wants to flex its big balance sheet muscle without a takeover being necessary.
Apollo probably now has access to one of the key aspects of CGF that had sparked its interest, namely, CGF’s strong product, brand, distribution and infrastructure. This is particularly relevant when seeking investment opportunities such as the flagged JV in non-bank lending in which Apollo can utilise its balance sheet.
CGF has already been adopting this approach through its Life Company and Investment arm. The Life Company anchors an investment with (say) a 20% stake then brings in other buyers. Apollo appears tailor-made to fill this part of the equation.
Nothing formal has been expressed by either company and as such, it is probably only loosely valued, if at all, in CGF’s share price.
The bank integration is well progressed, according to CGF, but is not expected to be profitable for the first year. The product set and distribution arrangements are still being fine-tuned so this remains a watching brief.
One area of concern involves the cost discipline (or lack of) within the result. CGF’s cost ratio has ballooned from 34% two periods ago to 38% now. We imagined CGF would be getting better operating leverage for the scale it is building and yet the costs keep sneaking up.
After several years of decline in the cash spread, CGF is finally in a sweet spot as the Life Book is growing while the COE spread is stable. CGF has noted the COE spread ending FY22f around 2.5% compared to 2.56% in 1H22. This looks too conservative and may just be the relatively new CEO and CFO being cautious.
CGF reiterated its guidance for FY22 profit before tax of $430-480 million. The mid-point represents a 15% increase over FY21.
Investment view
CGF’s game is retirement for Australians. Government policy has been fairly weak and even ad hoc for too long in this important industry. CGF welcomed the recent Retirement Income Covenant legislation that should enable CGF to partner with Super Funds to deliver innovative retirement income solutions.
Apollo and Athene still have an 18% stake in CGF, but perhaps this will no longer lead to a full takeover offer. Apollo and CGF are finding plenty of ways to co-operate on investments and venture that may be mutually beneficial. Perhaps the stake will serve as a reminder to CGF that it cannot drop the ball from here.
Investment view
ANN is staring at the abyss of plunging global glove prices as industry capacity gets way out of hand. Shaking the cost tree can only mitigate the situation so far, so ANN needs to participate in an industry-wide restructure before fortunes can be saved. This is plainly easier said than done, so management confidence in its guidance is understandably low.
Risks to investment view
CGF’s earnings would be at risk if the customer base fell and/or funds under management fell. Government policy can present a risk if changes adversely affected CGF’s business.
Recommendation
We have retained our Buy recommendation.
