Challenger Financial Svcs: Showing signs of improvement into FY22

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
11 August 2021, 9:30 AM
Sectors Covered:
Insurance, Diversified Financials

  • Challenger Financial Svcs (ASX:CGF) released its FY21 result, with most headline metrics in line with recently provided guidance (e.g. Normalised NPBT of A$396m). FY22 guidance was unchanged for NPBT to be in the range of A$430m – A$480m.
  • FY21 total Life sales (A$6.9bn) were a highlight up 35% on pcp which, combined with strong FUM growth in Funds Management (A$106bn, +30% on pcp) led to a robust divisional result (EBIT of A$71m, +23% on pcp).
  • In a surprise, CEO Richard Howes will step down in March 2022.
  • We make minor changes to our FY22F/FY23F EPS of -1%/-0.5% noting guidance was only recently provided at the June Investor day. Our PT increases to (login to view).
  • We see FY21 as the bottoming of earnings for CGF with sales momentum appearing to be improving and life margins stabilising. With the stock trading on 15x FY22F PE, we see value and maintain our ADD recommendation.

FY21 result

Challenger Financial Svcs's (ASX:CGF) headline result numbers were in-line with recently provided guidance from the June investor day, e.g. the normalised NPBT (A$396m) was at bottom end of the initial target range (A$390m – A$440m), with the Statutory NPAT (A$592m, inline with MorgansE) benefitting from A$319m in favourable investment experience. The 2H21 dividend (10.5cps) was also largely in-line with MorgansE.

Guidance into FY22 was unchanged with a NBPT target range of A$430m to A$480m. Management noting the mid-point of FY22 guidance implies CGF delivering its 12% ROE target and a ‘Life’ COE margin of 2.5%.

In a surprise move, CGF CEO Richard Howes will stand down in March 2022, after 3 years in the position, to pursue other interests.

The good

It was a solid FY21 Life sales performance, with total sales (A$6.9bn) up 35% on pcp and all business segments contributing to the growth (retail +19% on pcp, Institutional +53% on pcp, and Japan +6% on pcp).

The FY21 Life net book growth was a healthy 14.4% (FY20 2.1%), with particularly robust growth in 2H21 (9.7%) driven by a combination of strong sales but also slowing maturities.

The Life COE margin was up 10bps in 2H21 (2.65% vs 2.55% in 1H21), with management pointing to a relatively stable COE margin expectation in FY22 (~2.5%). CGF has seemingly finished deploying excess capital, with no significant change in asset mix expected in FY22.

A robust FY21 Funds Management (FM) result with EBIT (A$71m) up 23% on pcp, driven by strong growth in FUM (A$106bn, +30%) and a record level of inflows (FY21 ~A$16bn, ~A$9bn in 2H21).

PCA capital ratio of 1.6x is at the top end of the target range (1.3x to 1.7x).

The not so good

Retail and Japan sales in 2H21 both declined on pcp (-10%, -55% respectively).

The Life COE margin declined 72bps in FY21 (2.60% vs 3.32% in pcp) reflecting a shift to a more defensive asset allocation post COVID, and lower interest rates.

2H21 FM EBIT was flat vs. 1H21 (A$35m), with asset growth offset by a higher cost-to-income ratio (59.4% vs 56.6% in 1H21). FY21 FM performance fees were also down on the pcp (A$10m vs A$14m).

While Richard Howes appears to be leaving CGF when there is good momentum in the business, we see his exit as a loss to the company given his vast experience (18 years at CGF).

Changes to forecasts and investment view

We make relatively minor changes to our FY22F/FY23F EPS of -1%/-0.5% noting management provided recent earnings guidance at its June investor day. Our PT is set at (login to view).

FY21 likely saw the bottoming out of earnings for CGF and sales momentum continues to broadly show signs of improvement as the recent impacts of adviser distribution clear. With growth now back in focus, and with the stock trading on an undemanding 15x FY22F PE, we maintain our ADD recommendation.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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