With an ageing population and the risk of outliving our savings in retirement Challenger Ltd (ASX: CGF) has a compelling product offering which is well suited to the current environment.
About Challenger
Challenger is Australia’s largest provider of annuities, which are financial products that give investors a reliable source of future income. Investors typically pay a lump sum upfront and in return receive a guaranteed income stream into the future. Founded in 1985 Challenger has grown to be one of Australia’s key financial institutions, especially within the area of retirement planning where their products can provide retirees with peace of mind against the risk of outliving their savings.
Bad News
In June 2019, Challenger delivered an investment presentation which included a rather disappointing trading update. The share price was absolutely savaged, falling by as much as 20% in the weeks following the presentation. This has continued a protracted downward trend that has seen the share price fall by more than 50% since peaking a little more than 18 months ago.
The details of the announcement have been covered here but basically Challenger warned investors that its Normalised net profit for the 2019 financial year would fail to meet expectations.
Temporary Issues Create Opportunities
Broadly speaking, there are two types of issues that a company may face.
The first is the issues which are temporary in nature, typically arising out of some manifestation of the business cycle.
Then there are the more worrying issues which can be considered permanent, at least in an investing sense, and these issues typically relate to structural problems.
Fairfax Media Limited (ASX: FXJ) is a prime example of a company, which through the rapidly evolving landscape of media, faced issues with their business model which are permanent in nature (e.g. online news sources over print media). Fairfax were forced to evolve or die out.
Bottom line, it is when the share market treats those issues which are temporary in nature as if they were permanent that opportunities to bag a bargain can be found.
The Challenger trading update was extremely disappointing and demands a re-think of the investment thesis. However I would propose that the current issues facing Challenger are largely temporary in nature and as a result the selloff has created an opportunity for long term investors.
The Case For Challenger In 3 Points
The following points remain intact and on a long term basis are likely to reward patient investors:
1 An ageing population that will see 1 in 5 Australians aged 65 and over by the year 2035.
2 Challenger holds a commanding position in the annuities market recognized as the provider of choice by an overwhelming majority of Financial advisers.
3 Challenger has grown its annuities sales at a compound annual growth rate of over 17% per year over the past 5 years.
The Final Word
Looking through the short term noise with any sense of clarity can be very difficult.
Portfolio managers and analysts are under pressure to perform and we live in a society where we want it all and we want it now. However as an investor one of the greatest qualities you could possess is an ability to ignore the noise and focus on the long term picture.
With annuity sales set to grow for many years to come on the back of demographic tailwinds, Challenger remains well placed to benefit and reward patient investors in the process.
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Disclosure: At the time of publishing, Luke has a financial interest in Challenger Limited.