Morningstar cuts Challenger fair value estimate

Despite posting a solid half-year result with net profit after tax increasing by 12%, Challenger Limited has been the subject of a pragmatic assessment by research and ratings house Morningstar including having its fair value lowered from $7.50 to $7.00.
Reflecting general market reaction, Morningstar analyst Shaun Ler said the lowering of Morningstar’s fair value estimate reflects lower product earnings margins and funds management net flows due to competition.
“Shares are cheap, likely reflecting market concerns over materially lower future profitability,” his analysis aid. “We expect a decline in product earnings margins from fiscal 2024 levels as interest rates decline.”
Morningstar’s pragmatic assessment of Challenger came despite its acknowledgement that the firm’s earnings prospects are strong in circumstances where Challenger is positioned to benefit from Australian baby boomers transitioning to retirement.
In part, some of the rating house’s scepticism is based on its assessment that Challenger has economic exposures and that, while it is doing well at the moment, competition in the Australian retirement market is likely to intensify, setting the scene for margin compression.
“We see the potential for increased competition from either large life insurers (both domestic and international), pension funds or asset managers who are looking to increase their exposure to the Australian retirement market, if margins were to expand meaningfully,” Ler’s analysis said.
It noted that annuities are commodity like, with a relatively low barrier to entry requiring the establishment of a life business and being regulated by by the Australian Prudential Regulation Authority (APRA).
“We concur that Challenger’s relationships with advisors, super funds, and platform administrators grant it significant distributional advantage over competitors, but unlike an asset manager who can enjoy brand recognition and switching costs through strong historical performance, we think annuity investors (provided they are given a choice) will ultimately go with a provider who can offer the highest payment rate,” it said.
As my 10 year old grandson would say, "are you being sarcastic, Da" A little bit of satire is always…
Whilst there looking and snooping around, I was wondering if these nice Cyber Criminals could have a look for the…
Wonder if it will come up in conversation during their regular Friday afternoon golf game with ASIC? Maybe Aust Super…
Stop complaining....that staff party we had costing $90K for the day was real cracker.
A $4 Trillion $$$$ honey pot for scammers. Let’s hope ASIC, APRA / Govt and Super Funds do a much…