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Challenger (ASX:CGF) share price on watch after Q1 result

Investment manager Challenger Ltd (ASX: CGF) achieved a 3% increase in assets under management (AUM) for the first quarter of FY22.

The market is largely unmoved on the news, with the Challenger share price down 0.6% to $6.30.

How did Challenger perform in Q1?

For the first quarter of FY22, Challenger achieved AUM growth of 3% to $113 billion.

The business also recorded positive results across its three business divisions.

  • Life sales up 32% and 3.4% for Life book growth
  • Funds Management growth of 2%, including $1.4 billion of net flows
  • MyLifeMyFinance acquisition accelerating growth through direct-to-customer reach

The Life division provides annuity products generally as a substitute for retirement incomes.

An annuity is a fixed amount of money paid to someone each year in exchange for an upfront lump sum

As a hypothetical example, a client will give Challenger $2 million and receive a 3% yield ($60,000) per year until that client passes.

Challenger takes on the risk of guaranteeing the payments in return for the upfront lump sum. The client benefits from knowing it will have a $60,000 annual income stream throughout retirement.

The growth in Life was a result of strong institutional sales offset by lower retail sales as advisors activity remained low due to lockdown restrictions.

Funds Management incurred both net inflows and positive investment performance led by Challenger’s investment in Fidante Partners.

“Challenger has started 2022 positively, with strong momentum across the business, as we focus on executing our growth strategy, implementing plans to diversify revenue and expanding our retirement offering” – Managing Director and Chief Executive Officer Richard Howes

What’s next for the Challenger share price?

Management provided an update for its FY22 expectations.

The business anticipates normalised profit before tax of between $430 million to $480 million.

The midpoint of $455 million would represent 15% growth on FY21 and “continues to represent Challenger’s best estimate”.

Based on the midpoint guidance provided, Challenger is valued on a profit before tax multiple of 9.5.

I think this values the company fairly. It may look cheap compared to other businesses, but Challenger takes on a lot of investment risk by guaranteeing some of its annuity products.

Subsequently, I think better returns can be found elsewhere. Check two other ASX shares I’d buy and hold for the next decade.

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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.

Not only are we offering these 11 investment ideas completely FREE, we've also released an in-depth podcast to go with the report!

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At the time of publishing, Lachlan does not have a financial or commercial interest in any of the companies or funds mentioned.

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