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Here’s Why Challenger (ASX:CGF) Shares Fell 13% – Is It A Buy?

Challenger Ltd (ASX: CGF) shares have fallen 13% in early trade after issuing earnings guidance for the upcoming half year result.

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.

What Challenger reported

Although Challenger won’t be reporting its official result for a few weeks, the annuity company said it expects to report normalised net profit before tax of $270 million in the first half result.

The earnings have been impacted by market declines. In-particular the company said it received lower cash distributions, $13 million lower than last year, on Life’s absolute return portfolio and lower funds management performance fees, which were $4 million lower than the prior corresponding period.

Challenger’s statutory profit has also been impacted by the change in valuations on its balance sheet. The fund manager took an investment valuation hit of $153 million, including $117 million due to lower equity markets and $34 million related to wider fixed income credit spreads.

Any positives?

One positive piece of news from the announcement was that Challenger continues to be strongly capitalised. The ‘Prescribed Capital Amount’ (PCA) ratio of 1.54 times was slightly higher compared to 30 June 2018 and is at the upper end of the target of 1.3 times to 1.6 times.

Challenger FY19 guidance

Challenger has reduced its FY19 normalised net profit before tax guidance to a range of $545 million to $565 million. In FY18 Challenger generated normalised net profit before tax of $547 million, so Challenger is guiding between a 0.5% fall to a 3.3% rise.

Is the Challenger share price a buy?

Investors waiting to buy Challenger shares have been presented with a price that’s 13% cheaper.

However, the update today has shown why Rask Media founder Owen Raszkiewicz said he wasn’t interested in Challenger’s shares. There are a lot of complicated, moving parts to Challenger.

Over the long term Challenger has to do well with its investments to pay annuity-holders and generate profit & dividends for shareholders.

The Challenger supporters could probably sum up reasons to be positive with what Challenger CEO Richard Howes said in the update, “We continue to be well placed to take advantage of growth in the retirement income market.”

For now, it might be a wise decision to go for businesses with more reliable profit such as the ones in the free report below.

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Disclosure: At the time of publishing Jaz owns shares of Challenger, but that could change at any time. 

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