Carry-on, as you were
INVESTOR DAY
Need To Know
- Updated earnings guidance, in-line with market
- Commercial property asset valuations expected to fall 5%
- Further $40m capital release from selling the bank, likely to take capital to top end of range
- No earnings hole, continuation of a more simplified strategy should see the share price recoup much of its recent losses.
The CGF share price has been under pressure recently on fears of potential credit losses due to tightening global financial conditions, along with concerns that CGF’s commercial property exposure will hit earnings. Today’s trading up challenges both aspects of that view.
Earnings: revised guidance to “slightly above midpoint” of the $485-$535m profit before tax range. Market current $518m.
Commercial property valuations are expected to fall 5% on 30 June 2023 on revaluations – or approximately $100m. CGF property exposure has fallen over the last 5 years (from mid-teens) and is expected to fall further in FY24 to around 10% of the Life Investment Book.
Challenger Bank sale remains on track. Another ~A$40m capital release is expected to be returned before the sale, which is likely to take CGF’s capital position to the top end of its range. This reflects ~A$90m of the expected ~A$100m capital being released prior to the completion.
Challenger’s Digital refresh includes both front and back-of-house technology improvements. We continue to watch closely the recently launched direct online annuity capability which we think opens up the non-advised channel (i.e. balances <$300k).
Investment View
The last few years of low-interest rates have been tough for CGF, but these conditions have started to reverse, and we can now see CGF gaining the benefit of higher interest rates. New management continues to simplify the business, which we are supportive of.
The share price can trade on higher earnings multiple if the business can consistently earn its ROE target (RBA cash rate + 12%), something the market does not currently factor in.
We are buyers of CGF given the pathway to improved earnings (and ROE) from clearing macro headwinds and improving operational performance.
We rate CGF a Buy.
Figure 1: Demand for CGF annuities has accelerated…
Figure 2: Driven in part by much more attractive annuity rates.
Stock Overview
Share Price
Company Overview
CGF is a global investment manager offering retirement services and managing equity mutual funds.
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