Challenger Financial (CGF) Shares Recommendation

Submitted by Craig Strzelecki on 18 January, 2007 - 21:26

Challenger Financial (CGF) has a Buy 2 shares recommendation and a $4.60 share price target from shares analyst UBS. CGF have reviewed their balance sheet structure. The shares analyst has noted that CGF has a relatively unlevered balance sheet with gearing of just 4.4% at 2H06. However CGF does have non-recourse leverage, for example $286m of debt held against balance sheet property. Given improved earnings stability, strong growth and outlook, UBS see CGF potentially increasing its financial leverage during the next 12 months. UBS poses the next hypothetical case study: "On a quick "what if?" analysis we estimate c10% EPS accretion for CGF assuming $300m of debt and 15% pre-tax return on those funds. Gearing would remain comfortable at < 20% and EBIT interest cover at > 12x. A buyback of $300m at $4.25 would be 3.8% accretive on our estimates." UBS notes that CGF remains a key pick in financials. They see upside risk to earnings in Funds Management given strong FUM growth and CGF-specific performance. With c$1.6bn of b/s liquidity we see CGF Asset Mgt as cum-investment. We believe the past 2 yrs of b/s tidying present cap mgt opportunities. UBS sees the following Key positives: (1) positive earnings revisions (2) balance sheet capacity and growth (3) specialist funds capabilities emerging (4) investment spread expanding due to back/front book dynamics. Key risks for Challenger Financial: (1) Mortgage Mgt potentially harvesting the back book (2) some lumpiness in asset recycling (3) execution on deals.

Challenger Financial Group Limited is listed on the Australian Stock Exchange (ASX) under stock code CGF. You can view their investor website here. CGF was listed on the ASX on 23 December, 2003. Michael Tilley is the CEO and Peter Polson is the Chairman of CGF. Challenger Financial is a multi-faceted financial services organisation, with core businesses in annuities, funds management and administration platforms, financial planning, mortgage financing and margin lending. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade CGF. Check your charts and good luck with your share trading!