Challenger 1H17 results

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

15 February 2017, 10:51 AM

Sectors Covered:

Insurance, Diversified Financials

Some clear positives

Overall the 1H17 CGF result was relatively solid, in our view. 1H17 normalised NPAT of A$197m was ~2% above Bloomberg consensus of A$194m (Morgans estimate A$190m). Life cash operating earnings (COE) of A$316m were broadly in the middle of management’s re-affirmed FY17 guidance range (A$620m to A$640m).

While 2Q17 retail annuity sales growth of 25% slowed on 1Q17 (~46%), it was still impressive, including A$125m in sales in just two months from the recently announced MS Primary relationship in Japan.

CGF also unveiled a further two new distribution relationships with BT Financial Group and Standard Life.

Average new annuity tenor improved to 8.7 years (1H16: 5.6 years), with longer term annuities (including MS Primary sales) now representing 31% of total annuity sales (1H16: 14%). Finally the group cost to income ratio fell 90bps on pcp to 32.9% on improved efficiency outcomes.

Where was there weakness?

We saw a couple of areas of softness in the result. Firstly CGF’s life COE margin declined by about ~2% on 2H16, removing a one-off benefit (A$10m).

This decline is marginally larger than we expected, although on an underlying basis the product margin was stable, with the impacts being from lower shareholder funds/capital growth as flagged by management.

The second area of result weakness was the decline in the CLC excess capital position from A$1.01bn to A$772m in the half. While CGF indicated ~A$183m of this decline was due to “one off” impacts, we see CLC’s current CET1 ratio of 1.09x as only reasonable.

Furthermore, we think this ratio could face additional pressure going forward, given a focus on selling longer dated annuities, which could increase new business strain or require more growth assets to support the book.

Changes to forecasts

We lift FY17/FY18F EPS by ~1-2%. Changes to our numbers reflect a slight increase in net book growth assumptions which have offset lower COE margin forecasts. Morgans clients can login to view our updated share price target.

Investment view

We like the CGF story in the longer term and think management has done an excellent job opening up growth opportunities for the company. However, with CGF having re-rated strongly over the past 12 months, it is now more fully valued trading on 18x FY17F earnings.

We also think significant expectations are now built into the current share price and therefore we maintain our Hold recommendation.

More information

Morgans clients can login to view our detailed report and share price target for Challenger Limited (CGF). Alternatively, please contact your nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.