Challenger Financial Services Group (CGF) Share Trading Recommendation

Submitted by Craig Strzelecki on 27 February, 2007 - 06:24

Challenger Financial Services Group (CGF) has a Buy 2 share trading recommendation and a $5 price target from analyst UBS. The analyst have gone through the 1H07result numbers, which were good but challenging to dissect. Baseline NPAT $96m vs. UBS estimates of $87m. 1H07 reported NPAT of $113m was up 95% on pcp (& seq). Excluding $13m post-tax on CIF and $4.2m post-tax on rental one-offs $96m is a better base-line NPAT. Effective tax rate appears low at 24.8% but is not inconsistent with prior periods. 5cps dividend was vs. UBS estimate of 5.5cps. Another upgrade, this time due to: (1) higher investment spread in Asset Management (2) operating leverage, with EBIT margin 52% in 1H07 from 43% in 2H06. Earnings upside exists if CGF can continue to exceed RONA hurdles. Analyst earnings growth slowdown (9%/10% 08/09E) is predicated on reversion to 'normalised' RONA c.19%. CGF delivered 1H07 (vs. pcp): Funds Managemnt: EBIT +141% at EBIT mgn 30.6%, RONA 25% on FUM growth of 29.7%. Mortgage Managemnt: EBIT +19% at EBIT margin 59.4%, RONA 20.8% on Mortgage book growth of 12%. Asset Mgt: EBIT +46% (ex CIF) at 73% EBIT mgn, RONA 26.6% on Asset growth of 39.8%. Financial Planning: EBIT dn to $3.3m from $6m at EBIT mgn of 13.6%, RONA 4.5% and $7.7bn FUA. Positives observed by analyst include: (1) positive earnings revisions (2) balance sheet capacity (3) specialist funds capabilities emerging (4) investment spread expanding. Risks include: (1) Mortgage Mangement potentially harvesting (2) lumpiness in asset recycling (3) execution on deals. PT is SOTP based.

Challenger Financial Services 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. Find out the meaning of the recommendations in this primer. Challenger is one of Australia's largest non-bank mortgage lenders, funding commercial loans as well as a range of residential mortgage products offered by a network of preferred lenders under their own brands. It is a multi-faceted financial services organisation, with core businesses in annuities, funds management and administration platforms, financial planning, mortgage financing and margin lending. Challenger has a mortgage book of $21.6 billion. Peter Leith Polson is the Chairman of Challenger Financial and the Managing Director is Michael Tilley. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade CGF. Check your charts and good luck with your share trading!

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