The Challenger Ltd (ASX: CGF) share price is down another 3.4% this morning after the 17% fall yesterday due to a profit warnings.
Challenger is Australia’s largest provider of ‘annuities’, which are financial products typically sold to retirees who seek reliable income. Challenger was established in the mid-80’s and listed on the ASX in 1987. In 2018, Challenger managed more than $90 billion between its investment portfolio, which is the sum of the money invested by retirees who buy annuities, and its fund management business.
Why Challenger shares are down 3%
Yesterday, Challenger announced that investors shouldn’t expect as much profit in the December 2018 half year report.
Although the financial information is still being finalised and subject to audit review, Challenger thinks it will report normalised net profit before tax of $270 million.
The Life absolute return portfolio received $13 million lower cash distributions, representing a yield of 1.3% for the half year. There are also lower Funds Management performance fees, which are expected to be $4 million lower than last year.
One of the key problems for Challenger is that the statutory net profit is going to fall to $6 million for the December 2018 due to a negative investment experience of $194 million after tax, meaning the value of Challenger’s assets have fallen.
However, Challenger did say that both its prescribed capital amount (PCA) and CET1 ratios benefited from a reduction in capital intensity within the portfolio. The PCA ratio was at the upper end of the 1.3x to 1.6x PCBA target range. It has $1.3 billion more than APRA’s minimum PCA requirement.
Ultimately, all of this led Challenger to reduce its FY19 guidance to $545 million to $565 million for the current financial year, which would result in barely any growth or even a decline.
Challenger CEO Richard Howes said yesterday: “Challenger has a strong track record of success through the cycle, which gives me confidence in our performance over the longer-term.
Is Challenger a buy?
Mr Howes said that Challenger remains well placed to take advantage of the growth in the retirement income market. However, Challenger’s profits in the short term are linked to the movements in asset markets, which could keep falling this year.
If you want to buy shares then a patient investor could be rewarded with an even cheaper price in the coming days, weeks, or months.
If you’re looking for safety it could be better to go one of the reliable shares mentioned in the free report below.
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