Is it time to buy Challenger Ltd (ASX: CGF) shares after it reported growth in its September 2019 quarter update?
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.
Challenger September 2019 Quarter Update
Challenger announced that its annuity sales grew by 14% compared to the fourth quarter of FY19.
The annuity leader explained that annuity sales have been impacted by disruption to the Australian wealth management industry following the Royal Commission. The industry was disrupted in late 2018, so to provide a meaningful comparison it’s comparing against the June 2019 quarter.
However, Australian annuity sales were down 11% compared to last quarter, but Japanese annuity sales grew by $180 million and now represents 26% of total annuity sales.
Other Life sales, which represents institutional ‘guaranteed index return’ and ‘Challenger index plus’ products was $936 million, an increase of $737 million.
The life net book grew by $766 million, or an increase of 5.2% for the quarter in percentage terms.
Challenger reported funds management net flows of $437 million with funds under management (FUM) up by 2%.
Challenger Total Assets Under Management (AUM)
Challenger’s AUM grew by 3% for the quarter to $84 billion. The above useful net flows across the business and positive investment markets helped the growth this quarter.
Interestingly, the Challenger CEO and Managing Director said that the low interest rate environment has meant strong demand for guaranteed income products from some institutional clients as they seek to optimise the investment returns on the defensive part of the portfolio.
Is The Challenger Share Price A Buy?
Challenger said that its guidance for FY20 of normalised net profit before tax of $500 million to $550 million was unchanged. Challenger’s assumptions for investment markets and interest rates are consistent with what’s actually happening.
Investors will probably be pleased by this update. Challenger is valued at 11 times the estimated earnings for the 2021 financial year. Challenger looks quite cheap, but I’m uncertain what the long term effects of low interest rates will have on Challenger, so it’s in my ‘too hard’ basket of shares.
That’s why I’d prefer to buy the shares of the reliable businesses outlined for free in the report below.
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