Australia | Aug 29 2006
By Chris Shaw
Challenger Financial Services (CGF) has joined the list of companies to report a better than expected profit result, but equally important for the company is this result reverses its recent trend of falling short of expectations.
With the result also including more detailed exposure, which analysts enjoy as they can better compare the actual numbers to those in their models, GSJB Were expects the share price to be underpinned at current levels.
Profit of $125m was above the consensus forecast of $117m, with the Asset Management division the main source of upside thanks to some realised capital gains and higher fee income. As a result the broker has lifted its earnings estimates by around 6%, though it suggests increases to consensus forecasts are likely to be of a lower magnitude.
Weres is now forecasting earnings per share of 23.6c and 26.8c in FY07 and FY08, which is above the Merrill Lynch forecast of 23c and 24.3c but broadly in line with the median estimates according to Thomson One Analytics of 23c and 26c respectively.
Despite the uplift in earnings forecasts Weres suggests there is not enough in the stock at current levels for a more aggressive view than its Marketperform, L/T Hold rating, a view shared by Merrill Lynch. Its Neutral rating reflects its concerns over the outlook for the Asset management division, which it sees as challenging given the cost of funds is increasing at the same time as the yields on the assets it is trying to invest in are falling.
UBS also questions the sustainability of this fee income, though Deutsche Bank doesn’t agree, suggesting the higher fee income the division enjoyed in the period can in fact be sustained going forward. Both brokers rate the stock as Buy.
Another area of concern for those covering the stock is the financial planning operations, as UBS notes the division’s current strategic review aimed at lifting the return on net assets to the targeted level of 18% is expected to find such an outcome difficult to achieve, which is a slight negative for profits. Again Deutsche Bank takes a contrary view, suggesting the pushing out of this target to FY09 from FY08 previously has little actual impact on earnings.
Following the result the market has retained its positive view on the stock, this despite Weres acknowledging some of the pop has gone out of the share price following its run up prior to the result. The FN Arena database shows Challenger is rated as Buy six times against three Hold ratings, with an average share price target of $4.18. This compares to the median price target according to Thomson One of $4.06.
Challenger shares today are weaker despite the overall market being higher, as at 12.10pm the shares were trading down 4c at $3.39.