Challenger’s Resilience Highlighted

This story features CHALLENGER LIMITED. For more info SHARE ANALYSIS: CGF

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

Annuity and funds management provider Challenger’s March quarter indicated resilience to market volatility and management’s confidence in its FY25 outlook.

-Challenger tightens FY25 profit guidance range
-Management’s confidence apparent
-New relationships supportive
-Aging population an underlying driver

By Greg Peel

Challenger ((CGF)) provides a range of financial products aimed at older investors including lifetime annuities, term annuities, fixed term direct, income for aged care, managed investments and other products across an extensive range of investment options.

The highlight for analysts within Challenger’s March quarter update was a tightening of its FY25 profit guidance range to $450-465m from a prior $440-480m, which, slightly above forecasts, has been universally determined to suggest management’s increased confidence in the FY25 outlook, with yet two and a half months to go.

This suggests resilience in the light of current volatile market conditions and implies achievement of management’s return on equity target which Citi has always thought was likely, but may have been the subject of some market doubt.

Challenger is usually exposed to investment market losses in a widening interest rate spread environment, but in this context Citi sees the increase in the prescribed capital amount (PCA) ratio over the quarter from 1.61x to 1.62x as an encouraging sign, as do all covering brokers.

Challenger also observed its investment portfolio has performed in line with expectations since end-March, with its alternative investments portfolio demonstrating low correlation to equity and credit markets.

Ups and Downs

The positive March quarter report came despite a net outflow in Challenger’s annuity business, where its book contracted -$180m or almost -1% in the period, and a -5% fall in funds under management, which reflected funds outflows but more so the volatile market over the period.

Challenger’s annuity book showed signs of qualitative improvement. Sales of its retail lifetime product grew 22%, underpinned by a 33% larger contribution from its Japanese-market distributors that proved greater than the minimum required under their contracts, Ord Minnett notes, despite there being another quarter remaining in FY25.

Sales of longer-duration products, as opposed to shorter fixed-term offerings, improve returns for Challenger while also strengthening its book. Challenger has been less focused on growing its term annuity book in recent quarters as the current pricing environment has made earning adequate returns difficult.

The March quarter is normally seasonally soft, Citi notes, and FY25 seems no different. Even so, a 20% increase in sales year on year is seen as encouraging with longer term Japan and lifetime sales at record highs as a portion of total sales.

Challenger Index Plus (guaranteed alpha fund) sales are a weak point with some shorter dated sales failing to reinvest, but more positively, Citi notes, Challenger flags an expected funding of longer dated Index Plus sales in the June quarter and the first half FY26.

Challenger reported it had won a new $500m mandate for three- and five-year Index Plus contracts.

Looking Ahead

Bell Potter’s longer-term positive view is that Challenger should grow its longer dated lifetime and Japanese annuities and reduce its dependence on short dated fixed and Index Plus.

Supporting this view, Bell Potter notes, firstly, TAL Dai-ichi buying 15% from MS&AD suggests to the broker it is likely it will sign an annuities contract, which would increase the inflow of long dated annuities. Secondly there is a renewed focus on retirement provision, with APRA reviewing capital standards, with a view to encouraging growth.

Finally, there is an aging population with significant superfund assets, which worked well for accumulation, but not for efficient decumulation, and many would be better off with an annuity.

Morgans notes Challenger has announced a new partnership with NGS Super. From 2026, Challenger’s longevity solution will form part of NGS’s broader Retirement Income Strategy, providing its members guaranteed, regular income for life.

Morgans believes Challenger’s recent performance (three-year compound annual profit growth of 11%) has been under-rated by the market. The broker also believes the company remains exposed to strong structural growth tailwinds, highlighted by its new NGS Super partnership.

With the stock trading on an undemanding FY25 PE multiple of around 11x, a -19% discount to its ten-year average, and with greater than 10% forecast total shareholder return upside still existing, Morgans maintains its Add call.

Ord Minnett reiterates its Buy recommendation on Challenger given an appealing valuation and the prospect of government changes to Australia’s retirement policies that will make annuities a more attractive option for more people.

Citi continues to view the stock as offering attractions, with its resilience to current market volatility perhaps a little greater than the market previously perceived. Citi thus retains a Buy call, lifting its target price by removing its -10% discount between target and valuation.

Macquarie (Outperform) continues to like the long-term (aging population) thematic as management continues to focus on return on equity.

Seven brokers monitored daily by FNArena cover Challenger, but Morgan Stanley (Equal-weight) and UBS (Buy) are yet to update for the quarterly report. All five brokers updating retain Buy or equivalent ratings.

The consensus target (among all seven) has increased to $7.35 from $7.29.

Jarden has lifted its target to $7.50 from $7.40 and retains Overweight, while Goldman Sachs lifts its target to $7.40 from $7.25 and retains Buy.

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