Challenger Limited (CGF)
BUY

Softer underlying trends and outlook

 16 Aug 2022
Sector: Financials

Need to know:

  • Earnings inline, dividend ahead. Underlying divisional performance soft.
  • Larger than expected funds outflow.
  • Bank losses and goodwill write-down a negative surprise. Bank under strategic review.
  • New Chairman Duncan West comes a year after CEO transition. 

Investment Implications

CGF FY22 result: Earnings inline however softer than expected earnings outlook. FY23 NPBT guidance at mid-point implies 5% earnings growth vs market at 11%. The new guidance reflects larger than expected losses in the bank continuing to weigh in FY23.

Result details:  FY22 NPBT $472m vs $466m market. NPAT $321m vs $327m market. EPS 0.37cps vs 0.41cps market. DPS 0.23cps vs 0.22cps market. Funds Under Management (FUM) down ~12% yoy, reflecting market movements, but 4Q outflows of $2.5bn larger than expected. 

FY23 NPBT guidance within the range of $485m to $535m vs $526m market.

New Chairman: Duncan West (independent non-executive director) and on the Board since 2018, will take over from Peter Polson retiring after 19 years with the Company in October. This comes after Nick Hamilton was appointed CEO on 1 Jan 2022.

Strategic review of Bank. CGF has placed the Bank under strategic review. We would not be surprised if CGF walk away from the bank, given it lacks scale. The key issue in the eyes of the market is that bank was viewed by CGF as key contributor to growth. There is $120m of capital tied up within the bank.

Summary: Overall, this will be viewed as a soft result. The review of the bank suggests a strategic reset of strategy is underway. This raises the question is to the ability of CGF to meet its target Return on Equity (ROE) aspirations (RBA cash rate +12%) in 2023E. The lower starting point of FUM creates a more difficult task for 2023. Our Buy rating is under review.

This commentary reflects our initial view. For detailed reports for companies under Sandstone Insights coverage, see our latest research notes for our investment view and specific risks associated with investing in these companies.

Figure 1: FUM down FY22, with outflows of $2.5bn in 4Q. Lower starting point creates a headwind for 2023 earnings.

FUM down FY22, with outflows of $2.5bn in 4Q. Lower starting point creates a headwind for 2023 earnings.

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Stock overview

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Company overview

Challenger is an investment management company focusing on providing customers with financial security for their retirement.

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