Challenger Financial Svcs: Investor day - plotting a new course

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

25 May 2022, 7:30 AM

Sectors Covered:

Insurance, Diversified Financials

• Challenger Financial Svcs (ASX:CGF) has hosted its investor day in Sydney. The key themes of the day were CGF will rebrand all of its businesses under the Challenger name, with the company focused on growing through diversifying into new products and through new distribution channels.
• We think the broad strategic direction laid out makes sense, although execution is key. We observe on new growth areas, CGF called out the same ROE targets will apply to these activities as per the group overall (12% + the RBA cash rate).
• We make no changes to our forecasts as part of this update. Our target price moves slightly to (login to view) on a model roll-forward. With >10% TSR upside on a 12- month view, we maintain our ADD recommendation.

Event

CGF has hosted its investor day in Sydney. The key themes of the day were CGF will rebrand all of its businesses under the Challenger name (e.g. the Bank/Challenger Investment Management), with the company focused on growing through diversifying into new products and via new distribution channels.

Key financial comments from the day

1. CGF’s key FY22 guidance metrics were re-affirmed, e.g. NPBT at the top end of management’s target range (A$530m - A$580m) and the FY22 PCA ratio (1.61x) is also expected to be at the top end of the target range (1.3x-1.7x);
2. In regards to new growth areas, CGF will apply the same ROE target to these activities as per the group overall (12% + the RBA cash rate);
3. CGF noted credit spreads have widened and are being more supportive of its new business profitability;
4. CGF expects returns and margins will naturally benefit from higher recent bond yields and wider spreads, although these benefits will take time to season through the book;
5. CGF’s asset allocation and capital intensity will remain stable in FY23.

The strategy

CGF’s go-forward strategy is focused on:

1. Broadening the Challenger brand across CGF’s capabilities and developing new products (e.g. Global opportunities, Challenger income series) that will provide a more holistic offering to key client segments (institutional, HNW, etc);
2. Leveraging Challenger Investment Management’s (FUM = A$20bn) skillset, particularly in credit, to complement CGF’s existing guaranteed product offering; 
3. The CGF bank, a digital bank targeting the A$780bn term deposit market and lending opportunities;
4. A JV with Apollo that will build a lending platform in Australia leveraging CGF’s domestic expertise and Apollo’s global scale/capabilities;
5. A JV with Simcorp to build a SaaS Investment Administration platform servicing not only existing CGF businesses (e.g. Fidante, etc) but also third-party clients (e.g. investment managers, super funds, etc).

Key thoughts

We think the broader strategic direction laid out by CGF makes sense, e.g. developing new products (complementary to annuities), leveraging CGF’s existing skills (particularly CIM in fixed income) and targeting new distribution channels (e.g. HNW, direct, etc).

As always, time will tell on execution, but we like that the strategy is largely organic and certainly CGF is targeting areas with supportive structural tailwinds (e.g. demand for domestic private credit products).

The SaaS Investment Administration platform was arguably the most interesting new idea today, in our view. CGF sees an opportunity for this platform to compete against existing key providers of such services (State Street, etc) through providing a better service at a lower cost.

CGF said initial market soundings for its offer pointed to strong client demand and it believes this is a business that could scale relatively quickly

Changes to forecasts

We make no changes to our CGF forecasts as part of this update. Our target price rises slightly on a model roll-forward to (login to view). With >10% TSR upside on a 12-month view, we maintain our ADD recommendation.

Investment view

With an improving earnings trajectory into FY23 and trading on an undemanding PE multiple (FY23F ~16x), we maintain our ADD recommendation.

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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.