Challenger Meets Downgraded Expectations

By Glenn Dyer | More Articles by Glenn Dyer

A very different market reaction today to Challenger’s confirmation of a weak net profit of just $6.1 million in the December half, compared to the January 23 downgrade and reworked guidance when they plunged 17%.

The shares closed on January 23 at $7.65 – yesterday they ended up 1.1% at $7.92, which is hardly an example of outperformance.

The shock of the plunge in earnings – courtesy of the market mauling for shares in December especially has clearly eased because the price yesterday was higher, but the company will now remain under pressure until the August profit announcement for the full year, and any updates before then.

Challenger said net profit in the six months ended December 31 of $6.1 million was down from the $195.4 million in December 2017 half.

Revenue slumped 20.8% to $893.5 million, from $1.13 billion in the second half of 2018.

As in the January 23 statement, Challenger’s release yesterday played up what it calls ’normalised’ earnings.

“Normalised net profit before tax $270 million, down 2%… Normalised net profit after tax $200 million, down 4%,“ the press released said.

But that all excludes the impact of the market turmoil and its impact on the company’s business.

The statutory profit figure does. It wasn’t a pretty look.

“Statutory net profit after tax includes investment experience (being valuation movements on assets and liabilities supporting the Life business) of -$194 million (after tax). This was mainly due to lower equity markets and wider fixed income credit spreads. Statutory net profit after tax was $6 million,”

The company also cut its guidance for its net profit before tax in the second half from $565 million to $545 million, reflecting a flow-on effect from the first half and lower equity distributions.

In a show of confidence, the dividend was left unchanged at 17.5 cents a share for the six months.

The shares reached $13.35 in May last year.

“Our results have clearly been impacted by the difficult operating environment we’re experiencing, with increased market volatility, industry disruption, and political uncertainty,” Challenger CEO Richard Howes said in the statement accompanying the earnings release.

He said the results should be best viewed in terms of normalised profit after tax, as statutory profit includes valuation movements in assets and liabilities.

“While some of these factors are beyond our control, the fundamentals underpinning our business remain supportive,” Mr. Howes said.

“We continue to target a growing market of retirees, we have the leading retirement income brand in the country and our capital position remains very strong. “Our resilient position is well demonstrated by the solid domestic annuity sales we achieved in the half. Australian annuity sales were up 4 percent on the same period last year, reflecting the continued demand from retirees for our products,” he said.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

View more articles by Glenn Dyer →