The Challenger Limited (ASX: CGF) share price is getting pounded, down 5%, following the release of its third quarter FY19 results. Here’s what you need to know.
About Challenger
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-80s 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.
The 3 Key Points:
- Total assets under management increased 4% to $81 billion
- Total annuity sales fell 13% to $662 million
- Total Life net book growth was down 1.2%
Assets Up, But Annuity Sales Falling
While total assets under management increased, annuity sales fell across the board. The largest decline was in Japanese annuity sales, which fell 49%. Australian annuity sales also declined by 7% compared to the prior corresponding period.
According to Challenger, the reason for the loss of sales in Japan was, “higher US interest rates relative to Australia, reducing demand for Australian dollar-denominated products in Japan”.
The Total Life book growth was down 1.2%, meaning an outflow of $170 million. This came about as a result of annuity net inflows of $66 million being offset by “net institutional outflows” of $236 million.
Management Commentary
Challenger’s Managing Director and CEO Richard Howes said that while Japanese sales were down, their recently expanded relationship with MS&AD will build further resilience.
“Annuity sales continue to be impacted by lower Japanese sales and general disruption in the Australian financial advice market”, Howes said.
“However, while annuity sales via the major hubs were down, we are seeing resilience in other sectors of the advice industry with strong growth in sales by independent financial advisers (IFAs)”.
Outlook
Challenger’s FY19 guidance remained unchanged with net profit before tax estimates of between $545 million and $565 million.
One of the main risks for Challenger going forward could prove to be a rate cut from the RBA, which is starting to look increasingly likely. If Australian rates fall further relative to the US, Challenger may see Japanese demand fall further again.
There’s a lot of uncertainty in the space that Challenger operates in right now. I’d prefer to invest in one of the faster-growing ASX shares in the free report below.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
