Challenger Limited (CGF)
BUY

Life prevails

 14 Feb 2023
Sector: Financials

1H23 RESULT

Need To Know

  • Earnings beat on stronger Retail Sales, Life earnings.
  • Life margins well ahead of market, more to come.
  • Bank divestment remains on track.
  • We expect the market will put through earnings upgrades for FY23/FY24.

Result Highlights

Normalised NPBT in-line at A$250m vs market A$249m.  

Core Operating Earnings (COE) spread increased 0.13% from 2H22 to 2.76%. 

Life sales were A$5.5bn – a record half year. 

Interim DPS was 12c fully franked, inline with consensus. 

Bank divestment remains on track and is expected to return A$100m upon completion. 

No change to outlook. Group reaffirmed guidance for a FY23 Normalised NPBT of A$485-A$535m (implies a 10%-15% increase for 2H FY23 to meet top end of guidance range). 

We think guidance is conservative as it does not factor in February RBA rate rise or future rate rises during CY2023. In addition, the full run rate benefit of prior rate rises is yet to fully pass through to the COE spread in our view.

Investment View

The result has clearly demonstrated that CGF remains an industry leader in providing retirement products. Affirming its strategic appeal which is reinforced by a share register with strategic stakes from Apollo Asset Management (19%) and Japanese insurer and asset manager MS&D (15%). 

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. 

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Stock Overview

Share Price

Company Overview

CGF is a global investment manager offering retirement services and managing equity mutual funds.

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