Morningstar says Challenger ‘fair value’

Mike Taylor

Managing Editor/Publisher, Financial Newswire

16 February 2023

Challenger Limited has received a bullish assessment from research and ratings house, Morningstar which says it anticipates underlying net profit after tax (NPAT) growth “in the mid-teens over the five years to fiscal 2027.

The bullish assessment has come off the back of Challenger’s strong half-year result this week, with Morningstar stating its forecasts assume Challenger will increase its share of the annual transfer from pre-to-post-retirement phase at around 7.5% over the next five years, versus around 6% in fiscal 2022,” it said.

However, the research and ratings house also described the turnaround in Challenger’s business as “long-awaited”.

The Morningstar analyst note said the company was lifting its fair value estimate marginally to $7.90 per share from $7.80, from incorporating the time value of money and increasing expected annuity sales, partly offset by narrower earnings margins in the future.

“Rising rates will likely keep driving the life business’ growth, improving both volumes and margins. In the half, annuity sales to new clients continued to grow, margins expanded from higher investment yields, and reinvestments from existing clients were strong,” Morningstar said.

“We like that retail annuities are growing as a proportion of fixed- term product sales, and lifetime annuity sales are picking up pace. They are higher-margin and longer-dated than Challenger’s institutional products. Stronger earnings growth is likely if this favourable mix shift persists.”

“We forecast the life cash earnings margin to average 2.9% over the next five years, above fiscal 2022’s 2.6%,” the analysis said.

“This is more so due to higher returns from investing shareholder capital and mix shift toward retail and lifetime annuities, rather than higher product margins (investment yields less interest paid to policyholders).”

“Alas, product margins barely grew in the half. This is as Challenger had to lift its payment rates so it can grow market share, which we expect to persist due to competitive pressures. We believe Challenger can grow its share of the retail and lifetime annuity market, supported by its product innovation and extensive distribution network in these areas.