Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Politics, volatility and Hayne hit Challenger

Emma Rapaport with AAP  |  13 Feb 2019Text size  Decrease  Increase  |  
Email to Friend

Australia's largest provider of annuities, Challenger Financial (ASX: CGF) has blamed political uncertainty and market volatility for its 97 per cent plunge in profit for the first-half of fiscal 2019.

Net profit fell from $195.4 million a year ago to $6.1 million, against a backdrop of poorly performing equity markets and policy liabilities in its life division, which provides annuities, the company said on Tuesday.

Challenger flagged the result last month in a trading update, which saw 17 per cent wiped off the company's share price in a single day.

This prompted a 14 per cent downgrade in the company's fair value estimate by Morningstar equity analyst Chanaka Gunasekera. He dropped his FVE to $10.80 a share, from $12.60, warning of regulatory uncertainty stemming from a Productivity Commission report.

Challenger ASX Result 2019

Yesterday's reported 21 per cent drop in revenue, to $893.5 million, reaffirmed the downgrade, on the back of what management called "challenging operating conditions".

"Our results for the first half have clearly been impacted by the difficult operating environment we're experiencing, with increased market volatility, industry disruption and political uncertainty playing out across the sector," said Challenger chief executive Richard Howes.

"While some of these factors are beyond our control, the fundamentals underpinning our business remain supportive."

Domestic annuity sales were up 4 per cent, but down 7 per cent overall due to a decline in Japan sales, which fell 55 per cent. Challenger attributes this to reduced Japanese demand for Australian products, as higher US interest rates held prices at elevated levels.

Morningstar's Gunasekera said the result aligned with market guidance, but warned the impact from the banking royal commission could last longer than anticipated.

"Challenger's annuity sales were heavily impacted by the royal commission, as financial advisers are a major source of distribution," he said. "Organisations like AMP have been more focused on compliance and systems, as opposed to selling annuities."

Gunasekera said profit falls were exacerbated by lower than expected margins, as market volatility resulted in lower asset returns from one of Challenger's absolute return funds.

In the short term, Gunasekera sees risks for investors, but argues allocation to annuities is likely to increase in the long term given the transition of Australia's baby boomers into the pension phase.

He expects a delay in the government’s proposed new comprehensive income product for retirement legislation, as emphasis is instead placed on implementing the banking royal commission and productivity commission recommendations.

Challenger also confirmed its expected cut to full-year normalised profit guidance, now between $545 million and $565 million, from between $590 million and $612 million.

It does not expect to reach its 18 per cent normalised return on equity before tax target.
The company will pay an interim dividend of 17.5 cents, fully franked, unchanged from last year.

Challenger closed the day up 1.14 per cent at $7.92, but down 38 per cent from $12.94 in February 2018.

Headline figures

• Total assets under management up 2 pc to $78.4 billion
• Statutory net profit after tax down 97 pc to $6 million
• Normalised net profit before tax down 2 pc to $270 million
• Interim dividend unchanged at 17.5 cents per share, fully franked

 

 

. Emma Rapaport is a reporter for Morningstar Australia.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend