Challenger (CGF) – One Of The ‘Safest’ Bets in Retirement Planning?

By Simon Herrmann | More Articles by Simon Herrmann

A recent survey conducted by the Australian Bureau of Statistics (June 2015) reveals that the proportion of people older than 65 years of age increased 26% between 1995 and 2015. During the same period, the number of people over 85 years grew 148%, compared with the total population growth of 32.1%. The average life expectancy in Australia is 83 years, much higher than the world average 71.7 years. Subsequently, the total number of SMSFs have risen from 991k in 2014 to 1.05 million in 2015. These dynamics highlight the rising demand for retirement planning in Australia.

Challenger is one of the largest providers of retirement products in Australia and its stock (ASX:CGF) has defied weakness in the overall share market. Strong industry fundamentals have helped Challenger to post a record profit for the first half of FY16.

Last year, the Australian Government proposed policy changes that actively support retirement income products as it tries to formulate a way for retirees to release the equity in their existing homes and provide better income. The policy changes could help Challenger to arise as a beneficiary of these amendments.

With an ageing population and a greater need for retirement products, is CGF one of the ‘safest’ bets on the ASX?

Challenger Limited in Focus

Challenger Limited is an Australian investment management firm that focuses on providing financial security instruments and other retirement income products. The company has two core business operations, which are managed under Life and Funds Management divisions. It provides fixed term annuities, lifetime annuities, fixed rate managed funds etc.

The government emphasised on the importance of comprehensive income products as it responded to a number of Financial System Inquiry’s suggestions in September 2015. It also mentioned that superannuation trustees have to pre-select a comprehensive income product for their retirement. This product will initiate and terminate according to members’ instructions. This policy change is accretive to Challenger as it could potentially drive demand for its annuity products. Additionally, the government has been in consultation with the company so as to formulate the policy changes.

The company held its AGM on 27th October, 2015 where Mr. Peter Polson, the Chairman commented that 2015 has been a watershed year for Challenger as retirement income needs have gained greater importance in the past 12 months. He also noted that Australians are living much longer and subsequently need their retirement solutions to provide reliable income which lasts as long as they do. The Chairman reaffirmed that the company’s Comprehensive Income Products for Retirement support the upcoming policy amendments.

Challenger’s products are highly advocated by financial planners, making it the market leader in the annuity and retirement services industry. Moreover, the company is also set to benefit from its products being promoted by Australia’s largest investment provider platform, Colonial First State. Challenger’s products will be provided to the 10 million clients of Australian Administration Services by mid-2016.

Challenger Raises Profit by 80%

Recently, Challenger released record interim results with statutory NPAT up 80% to $234 million, which included $30 million from positive ‘investment experience’ and $22 million from other significant one-off items such as the sale of Kapstream Capital.

Challenger Life expanded its Assets under Management to $13.1 billion as at 31 December 2015. Moreover, the segment’s margin increased 10 bps to deliver a 14% increase in cash operating earnings (COE) and a 15% rise in earnings before interest and tax (EBIT). Total Life net flows logged $347 million, representing 3.6% total book growth.

Average Funds under Management expanded 4% on the previous comparable period to $54.8 million. However, the average FUM rose 15% if the Kapstream sale impact is not included.

The segment’s net income rose 20% to $67 million, which is ascribed to the revenue contributed from Dixon Capital (acquired in July 2015), and income from new third-party agreements for Challenger Investment Partners.

Challenger’s board declared an interim dividend of 16 cents per share, up 10% and fully-franked compared with a 70% franked dividend during the previous year.

Wise-Owl’s Take

Wise-owl recommended to buy CGF in February 2015 and we are firmly holding it in our Dividend Portfolio. The stock is travelling in a long-term uptrend, and despite evident volatility, Challenger offers profitable exposure to the retirement income industry. We are attracted to its income growth trajectory, industry fundamentals and fully-franked dividend. Equity markets around the world have experienced increased selling pressure and even great companies with a favourable long-term outlook are not immune against these movements. However, one of the most important lessons for SMSF investors is to hold on to companies with high-quality earnings and robust balance sheets. Challenger is one of these companies and we firmly maintain our hold recommendation.


Simon Herrmann – Equity Analyst at Wise-owl

Simon is a financial advisor and analyst at Wise-owl. As an analyst Simon’s focus is the coverage of mid-capitalisation companies in the ASX300. His area of expertise includes information technology and cloud computing and his research reports are being featured on Bloomberg and Reuters.

Simon Herrmann

About Simon Herrmann

Simon Herrmann is a financial advisor and analyst at Wise-owl. His area of expertise includes information technology and cloud computing and his research reports are being featured on Bloomberg and Reuters.

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