Challenger Ltd (ASX: CGF) announced a painful loss in its FY20 result because of the COVID-19 market sell-off. The Challenger share price is down 3.7%.
Challenger is a fund manager, it’s the largest provider of annuities in the country.
FY20 result
Challenger announced that it saw group assets under management rise by 4% to $85.2 billion over the year.
There was net inflows of $2.5 billion into its funds management, which was better than the broader market.
Life sales grew by 13%, reflecting the growth of its institutional sales and an above target contribution from the partnership with MS Primary in Japan. Challenger also said that Life’s wholesale longevity business completed three transactions in the UK pension market during the year. These transactions resulted in a significant increase in the value of future profits which will support future earnings growth.
However, total annuity sales fell by 12% to $3.1 billion. Management said this decline was due to structural changes in the wealth management market as well as new age pension rules and the COVID-19 disruption.
Its normalised profit before tax dropped 8% to $807 million and the normalised net profit after tax fell 13% to $344 million. The ‘normalised’ result removes the effects of investment value changes.
The statutory net result, which does include investment movements, showed a net loss of $416 million due to significant investment declines because of the market sell-off.
There will be no final FY20 dividend due to the uncertain conditions, market volatility and the aim of maintaining a strong capital position.
Outlook
Challenger is expecting normalised net profit before tax to be in the range of $390 million to $440 million. That would mean a drop of 13% to 23%.
The company is planning to deploy its capital, around $3 billion, over the course of the year. The guidance reflects maintaining a defensive portfolio and carefully managing expenses.
It’s still aiming for a normalised pre-tax return on equity of the RBA cash rate + 14%. So at the moment that suggests a 14.25% target.
In terms of the dividend, it will be targeting a payout ratio of 45% to 50% as conditions allow.
Summary
This was a pretty disappointing result from Challenger. The company is growing its assets under management but it’s not generating good returns from the assets. Challenger needs to generate good profit to afford the annuity payments and to pay sustainable dividends to shareholders.
After COVID-19 Challenger will need to make good investment returns within its business or else I don’t think Challenger will be able to make good returns for shareholders. There are other ASX growth shares I’d rather buy first.
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