CGF

Challenger Group (CGF) has a price target of $6.75 with a Buy Recommendation from Australian shares analyst UBS. June Annuities sales stronger than trend: Data shows June annuity sales of $153m, against recent trends of c$120m p/mth. This is attributable to strong wealth/retirement income flows prior to June y/end. Further strong months of data are anticipated leading up to September 20, when deductibility is eliminated. They expect this change to materially reduce retirement income product demand in favour of superannuation accumulation-based products. Challenger Group (CGF) asset funding mix already changing: Annuities form a key component of CGF's Asset Mgt balance sheet, providing c$2.1bn of $3.5bn asset funding at 2H07. This is supported by $1.0bn of equity and $187m of subordinated debt, with a further $400-500m of sub debt planned. Challenger (CGF) may increasingly fund its Asset Mgt growth via off-balance sheet specialist funds in our view. This would enable more rapid growth and co-investment opportunities via the statutory funds on CGF's balance sheet. A further $1.8bn of annuities has now been moved to Challenger's balance sheet following completion of the acquisition from MetLife at 31 Aug 2007. The analysts do however acknowledge the following risks: (1) mortgage funding pressures may begin to bite in 6mths time if current illiquidity persists (2) structural asset value leverage to bond yields (3) lending covenants on term funding may tighten, compressing equity IRR. Read a previous recommendation for Challanger (CGF)

Challenger Group have a Buy 2 broker call and a share price target of $6.75 from Australian stockmarket analyst UBS. Business Growth continues to exceed expectations: Asset Management divisional update: Challenger Group provided a positive update on its Asset Management business, which accounts for c60% of group EBIT. The update highlighted (1) CGF’s diverse funding sources on and off-balance sheet, (2) strong business growth – particularly in off-balance sheet Specialist Funds ($3.5bn from $0.6bn 1 yr ago), and (3) asset class exposures and expertise. Confirms MetLife deal, zero consideration: Challenger Group confirmed that it expects to close the MetLife portfolio acquisition at the end of July 2007. This (1) doubles the Challenger Group annuity funding pool from $2bn to $4bn (2) provides scale for asset investment opportunities (3) supports growth in the fee-based specialist funds business, and (4) supports a strong 3-yr earnings growth outlook. Material earnings upgrades, but not just from MetLife: they have upgraded 2-3yr earnings forecasts significantly: 10% in 09E. This is driven by the deployment of MetLife, as well as higher Specialist Fund FUM driving increasing fee income streams. The analysts have a new SOTP-based valuation of $6.75 with their Buy 2 rating unchanged.Key positives for Challenger Group: (1) strategy and rollout accelerating (2) step change potential in MetLife (3) earnings upside potential. Key risks: (1) Mortgage Management spreads (2) Asset contestability (3) asset realisation unpredictability (4) strike rate on deals.

Challenger Financial Services (CGF) has a Buy 2 broker call and a share price target of $5.75 from sharemarket analyst UBS. The company's March Quarter update reinforces positive trends with Group Assets up 17.9% on pcp CGF reported March Quarter Funds/Loans under Administration. Key points from Challenger financial: (1) Funds Management $16.2bn, up 4.4% seq and 29.1% on pcp (2) Mortgage Mgt now $22.0bn, with resi lending up 1.7% seq and 8.1% on pcp showing some improvements (3) Asset Mgt has $5.4bn with off-balance sheet FUM up to $2.1bn from $0.6bn at pcp (5) Financial Planning had a good Qtr up 4.7% and Advice funds up 20% on pcp. Balance of risks appears to the upside vs. estimates: Group Assets $47.8bn up 3.1% seq and 17.9% on pcp. CGF also delivered operating leverage at 1H07 result with EBIT margin of 52% from 43% in 2H06. The analyst believes that the improving returns and continued underlying asset growth sees credibility of double-digit earnings growth expectations gaining traction. Challenger Financial Services Group is trading at c15% discount to market and is forecast to deliver strong 18% underlying earnings growth into FY08E. The anlaysts believe upside potential exists in (1) spread generation from the MetLife transaction (2) return on reinvested capital in the Asset Managementbusiness (3) Revenue improvement in Financial Planning. Potential Positives identified by the sharemarket analyst: (1) earnings revisions (2) balance sheet capacity/flexibility (3) specialist funds capabilities emerging (4) investment spread expanding. Potential Risks for Challenger Financial: (1) Mortgage Management squeeze (2) lumpiness in asset recycling (3) execution/strike rate on deals.

Challenger Financial Services (CGF) has a Buy 2 share recommendation and an increased price target of $5.75 per share from analyst UBS. During 1H07 CGF's Asset Mgt business delivered pre-tax RONA of 30%, above divisional targets of 18%. This was driven by attractive asset yields, fee generation and strong operating leverage (EBIT mgn 73.5%). The analyst's forecasts anticipated a reversion to 18%, which appears unlikely at least in the near term. The Asset Management division should be able to reinvest its organically generated capital, given low capital intensity of other divns (Funds Mgt, Financial Planning, Mortgage Mgt). This enables an accelerated rollout of the specialist fund strategy and maintenance of higher rates of return. Each 1% increase in Asset Mgt RONA is ~3% to group earnings in FY08E. Challenger Financial (CGF) remains a key pick in financials for the analyst. Their EPS forecasts have increased by about 9% in 08/09E, price target increases to $5.75, which implies 16.4x FY08E. This appears cheap given the strong earnings growth with underlying NPATg of 18% in FY08 (ex CIF deconsolidation). The analyst observed the following positives for Challanger Financial Services: (1) earnings revisions (2) balance sheet capacity/flexibility (3) specialist funds capabilities emerging (4) investment spread expanding. Risks facing Challenger Financial as observed by the anlyst: (1) Mortgage Mgt potentially harvesting (2) lumpiness in asset recycling (3) execution/strike rate on deals

Challenger Financial (CGF) have a Buy 2 share trading recommendation and a price target of $5 per share from stock analyst UBS. The analyst sees the following positives for Challenger Financial: (1) earnings revisions (2) balance sheet capacity/flexibility (3) specialist funds capabilities emerging (4) investment spread expanding. Risks for CGF: (1) Mortgage Mgt potentially harvesting (2) lumpiness in asset recycling (3) execution on deals. The diversified financial company have released December 2006 annuities data which comfirms CGF's market position. Total annuity market sales were $111.1m in Dec06, dn 6.9% seq and 12.6% on pcp. However CGF sales of $32.3m were up 13.1% seq and 10.3% on pcp. As a result CGF's market share climbed to 29% of new sales in Dec06 from 23.9% in Nov06 and 23% at Dec05. Growth came from long-term annuities, a key funding source for CGF's Asset Mgt business. CGF recently announced the zero cost acquisition of Metlife's $2bn annuities and personal super business. Although the transition of $2bn in cash and fixed income securities to CGF's preferred portfolio asset allocation may take 3 years, the analyst sees significant potential earnings upside from this acquisition. In the analyst's view CGF remains a key pick in financials and value CGF's Asset Mgt business (FY07 basis) at: (1) $2.13 for 1.5x historic cost net assets (i.e. the balance sheet), and (2) $0.44 for 10% of specialist FUM (i.e. the off-balance sheet). This does not capture unrealised gains or potential growth if Challenger Financial can recycle or originate new assets into funds.