The Challenger Ltd (ASX: CGF) share price bounced today after the company released its full-year results which were in-line with previous guidance. Can the share price now begin its recovery?
Financial Results
Challenger have delivered a normalised net profit before tax of $548 million which was up $1 million from FY18 and falls just inside guidance the company gave at their Investor day presentation back in June of $545-$565 million. The company prefers to use normalised earnings as it better reflects the underlying performance of the business operations.
Normalised net profit on an after-tax basis fell $10 million to $396 million and on a statutory basis net profit after tax was down $15 million to $308 million. Total assets under management grew by 1% over the year to $81.8 billion as of June 30.
Results were negatively impacted by the challenging operating environment driven by the disruption in the financial advice industry over the past 12 months.
In its funds management division, Challenger said strong underlying earnings/profit were offset by lower performance fees which fell from $16 million in FY18 to just $3 million in FY19. As a result, net income from the division was down $1 million to $150 million.
The Life division, which is predominantly made up from their annuity sales, was steady with book growth offset by lower margins. Total life sales came in at $4.6 billion, down 18% on FY18. Annuity sales fell by more than 10% to $3.5 billion.
The decline was largely due to a 54% decline in MS Primary sales in Japan due to higher US interest rates relative to Australia. However the contribution from MS Primary is expected to rise significantly in FY20 and beyond due to an agreement with Challenger to reinsure US dollar annuities in Japan starting from July 1, 2019.
Management Comments
Commenting on the result, Challenger’s CEO Richard Howes said: “While significant disruption has clearly impacted our results in 2019, our outcomes demonstrate the strength of the franchise we’ve built. Our market leading brand, diverse distribution channels and compelling product offering underpin our performance.”
“Challenger has continued to attract solid retail inflows in both Funds Management and in Life, despite retail flows across the sector hitting record lows last year.”
Howes added, “In 2020, our investment of up to $15 million in new distribution, product and marketing initiatives builds on the strong foundations of our business to drive the next phase of growth. These initiatives support our goal to make annuities a mainstream option in retirement by promoting bottom-up customer demand for our products, and better supporting advisers to write annuities.”
Challenger Outlook & Dividend
Challenger says it expects the challenging operating conditions to persist but also insists that the company is well-positioned to capture opportunities as they emerge. Management reiterated guidance previously given in June for a normalised net profit before tax in the range of $500-$550 million.
Management maintained the final dividend of $0.18 which brings the full-year dividend to $0.355. The company also stated that they expected next year’s dividend to remain at the current level. At the current share price of $6.50 this translates to a dividend yield of 5.5% which is almost identical to that of Commonwealth Bank Of Australia (ASX: CBA) at 5.4%
A Buying Opportunity?
The Challenger share price has fallen more than 50% since hitting a peak of over $14 less than 24 months ago. Whilst there are obvious short term headwinds I think if you take a longer-term view it’s hard to imagine Challenger won’t benefit greatly from an ageing population and superannuation assets which are set to double over the next decade.
I own shares in Challenger and have taken the opportunity to purchase more around current levels.
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At the time of publishing, Luke owns shares of Challenger.
