Challenger Financial Services

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 Services (CGF) have maintained their Buy 2 shares recommendation and a $5 share price target from shares analyst UBS. The analyst notes the following 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: (1) Mortgage Mgt potentially harvesting the back book (2) some lumpiness in asset recycling (3) execution on deals. They note the key trends: Funds Mgt FUM +13.3% in Dec Qtr, +29.7% 12mths to Dec06. Mortgage Mgt loans up 1.5% in Dec Qtr, but just 1.0% in resi lending. Total loans up 9.6% in 12mths. Asset Mgt b/s grew 6.1% during the Qtr - off balance sheet FUM up 68% or ~$800m during the Qtr driven by CDI listing. Financial Planning metrics disclosed showed encouraging 6.7% growth in funds under advice during the Dec Qtr. Funds Mgt growth the key driver of upgrades, with some offset in Mortgage Mgt. Asset Mgt off balance sheet FUM growth has the potential to drive further incremental upgrades. They note that this is the 3rd earnings upgrade delivered since the FY06 result in Aug06.

SB Citigroup has a hold, high risk rating for Challenger Financial Services Group (CGF), all the while increasing their target share price from $4.10 to $4.15. "The analysts note, however, they believe the risk/reward equation has come more into investors' favour in recent weeks as Challenger's share price has fallen 8% since the release of its 1H06 result.