Challenger Group

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.