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Is Challenger (ASX:CGF) a cheap recovery play?

Challenger Ltd (ASX: CGF) has given its September 2020 quarter update. Is it too cheap to miss?

Challenger is a large Australian fund manager and it’s the leading provider of annuities in the country.

Challenger’s September 2020 update

The annuity business revealed that its group assets under management (AUM) increased by 4% for the quarter to $89 billion.

Its ‘Life’ investment assets grew by 4%. Annuity sales increased by 46% compared to the prior corresponding period. It saw total book growth of 0.8% for the quarter. Challenger also benefited from positive returns during the quarter.

Challenger’s funds under management (FUM) grew by 5% for the quarter, including $3.6 billion of net inflows.

Management said that there has been significant progress of deploying the Life cash balance into higher yielding investments.

There were a couple of highlights within the annuity sales. Lifetime sales included $114 million from a new institutional client. Japan (MS Primary) sales were $391 million, an increase of 79%.

With the higher Australian lifetime and Japanese sales contribution, long term annuity sales represented 49% of total annuity sales, which Challenger says are more valuable because of their longer maturity profile.

Challenger management comments

Challenger Managing Director and CEO Richard Howes said: “Challenger’s performance in the first quarter demonstrates the success of our strategy to diversify our business geographically and across customer segments. Our record annuity sales reflect strong growth in the contribution from Japan as well as domestic institutional and retail annuity sales.

Overall Challenger is well positioned for continued growth with diversified revenue streams in its annuities business, a differentiated funds management offering generating leading flows and a strong capital position.”

Are Challenger shares too cheap to miss?

Challenger reaffirmed its FY21 normalised net profit before tax guidance range of between $390 million and $440 million.

The Challenger share price has risen by almost 5% in early trading, so it’s not as cheap as it was.

Challenger may benefit from the future flows into the superannuation pool. And according to CommSec estimates, it’s priced at around 10 times the estimated earnings for the 2022 financial year.

That looks cheap. But it’s cheap for a reason. Interest rates are very low, meaning Challenger can’t earn much from its fixed interest investments. There are other fund managers which I’d class as ASX growth shares that I would rather buy first like Magellan Financial Group Ltd (ASX: MFG), Australian Ethical Investment Limited (ASX: AEF) and Pacific Current Group Ltd (ASX: PAC).

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Are you stuck wondering where to invest right now? Have you got cash 'sitting on the sidelines'? Are you looking for dividend income AND growth but don't know where to start? Rask's expert ASX analyst team has just released a full report, detailing where we'd invest $10,000 right now.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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