Despite huge falls to the Challenger Ltd (ASX: CGF) share price over the last 12 months, some big brokers think the shares could go higher.
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-80s 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.
A Tough 12 Months
Over the last twelve months, Challenger shares are down more than 32%.
While it has mostly been a steady decline, the Challenger share price did get a boost two weeks ago when the company announced that they’re expanding their existing relationship with Japanese-based MS&AD Insurance Group.
MS&AD will provide Challenger with Life an annual amount of reinsurance across both Australian and US dollar annuities of at least $640 million per year for at least five years. You can read more about that deal here.
Possible Upside
Challenger claimed in their most recent half year report that they have strong growth tailwinds from an ageing population and growth in the superannuation system. They said their Life business is “highly scalable” and described themselves as the, “leading retirement incomes brand”.
Were Analysts Convinced?
Short answer: yes.
Analysts at Goldman Sachs have a twelve-month price target for Challenger of $8.40, compared to the current price of $7.74. Meanwhile, The Wall Street Journal reported even more optimism from analysts with a consensus price target of $8.79. Of the 14 analysts surveyed, four analysts buy ratings on Challenger shares.
Why I’m Not So Convinced
In the same half-year report mentioned above, Challenger talked about tailwinds but they also reported a 4% decrease in underlying profit, or a decrease of 97% (depending on how you think it should be calculated).
Challenger CEO Richard Howes said in the report, “Our results for the first half have clearly been impacted by the difficult operating environment we’re experiencing, with increased market volatility, industry disruption and political uncertainty playing out across the sector”.
Looking ahead, I don’t think volatility is going to decrease; the IMF came out yesterday and confirmed their view of the Australian economy had soured.
If Challenger was affected by volatility in the last half, shareholders should prepare themselves because it will likely happen again.
I’d be much more comfortable owning one of the shares mentioned in the free report below.
[ls_content_block id=”14945″ para=”paragraphs”]
Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
