Challenger Financial Svcs: A reasonable 1Q22 performance

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
20 October 2021, 8:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • CGF has recently released its 1Q22 performance update.
  • While not a perfect quarter, we did see 1Q22 as broadly a solid performance highlighted by 32% total Life sales growth, and 3.4% total Life book growth.
  • We upgrade our CGF FY22F/FY23F EPS by 2%-5% on higher sales/book growth assumptions. Our PT rises to (login to view).
  • FY21 likely saw the bottoming out of earnings for CGF and sales/book growth momentum appears broadly reasonable, in our view. With CGF still trading on an undemanding ~16.5x FY22F PE, we see value and maintain our ADD recommendation.

A decent quarterly performance

CGF has recently released its 1Q22 performance update.

Overall, total Life sales (~A$2.1bn) rose 32% on pcp and ~95% sequentially, while Life investment assets rose 2% in the quarter to A$22bn. 1Q22 total Life book growth was robust at 3.4% and well up on pcp (0.8%).

Funds Management FUM rose 2% in the quarter to ~A$108bn, driven by net inflows of A$1.4bn and a A$1.7bn contribution from markets (net distributions of ~A$0.5bn). Group AUM rose 3% in the quarter to ~A$113bn.

Management re-affirmed FY22 NPBT guidance of A$430m–A$480m.

CGF’s capital position remains sound, with its PCA ratio in-line with its target of 1.6x (target range of 1.3x–1.7x above regulatory requirements).

Digging into the annuity sales detail

Broadly, the quarterly sales performance can be described as a stable life annuity sales result on pcp (A$1.2bn), with other life sales (A$856m) being up 148% on pcp (A$344m).

The stable life annuity sales performance reflected a mix of strong institutional fixed term sales (A$504m, +233% on pcp), offset by some weakness/declines in other segments, e.g. retail annuity sales (A$381m, down 21% on pcp), Japanese sales (A$245m, down 37% on pcp), and Lifetime sales (A$101m, down 51% on pcp).

On domestic retail sales headwinds, management attributed this to COVID disruptions leading to subdued adviser activity, as well as a more competitive environment overall for short-term annuities.

Our thoughts

While not a perfect quarter, we did see 1Q22 as broadly a solid performance by CGF highlighted by 32% total Life sales growth and 3.4% Life book growth. The easing of COVID lockdowns may also provide a more favourable domestic retail sales environment in future quarters, in our view.

While acknowledging CGF’s FY22 NPBT guidance range is wide, we see the bottom half of the range as likely conservative.

Changes to forecasts

We upgrade our CGF FY22F/FY23F EPS by 2%-5% on higher sales/book growth assumptions. Our PT rises to (login to view).

Investment view

FY21 likely saw the bottoming out of earnings for CGF and sales/book growth momentum broadly appears reasonable, in our view.

With CGF still trading on a relatively undemanding ~16.5x FY22F PE, we see value and maintain our ADD recommendation.

Risks

Risks to our ADD recommendation include: an inability for CGF to maintain current strong sales and net book growth; lower asset yields seeing a significant retraction in CGF’s life COE margin; unforeseen negative regulatory change and; a large rise in defaults affecting CGF’s investment portfolio.

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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.

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