Market plunge adds to Challenger’s bigger challenges

Market plunge adds to Challenger’s bigger challenges

Challenger’s statutory profit for the December half will be just $6 million, down from $195 million in the previous corresponding period.

Normalised profit, which Challenger says strips out one-offs and reflects the performance of the underling business, will slip 2 per cent in the first half to $270 million.

Forecasts slashed

As a result of this poor first half, guidance for normalised net profit in the full year has been cut from between $591 million and $613 million to between $545 million and $565 million.

That’s a cut to guidance of 7.8 per cent at the mid points of the old and downgraded profit forecasts.

Howes curiously wasn’t talking to the media on Wednesday – his official coming out party will be held on February 12, when Challenger releases its interim results – but he tried to put a brave face on the bad news.

“Challenger has a strong track record of success through the cycle, which gives me confidence in our performance over the longer term. We continue to be well placed to take advantage of growth in the retirement income market,” he said in a statement.

Investors, it appears, have far less confidence in the company’s outlook.

The market may have dealt Challenger this latest blow, but Howes faces broader challenges as he gets his feet under the desk.

The stock has fallen from a peak of $14.01 a year ago to just above $8 in mid-morning trade, near three-year lows, as the market has wrestled with what analysts see as a battle between the company’s growth prospects and its margins.

Volatility to blame

While Challenger is perfectly placed to benefit from the ageing population – best demonstrated Coalition government’sMyRetirement reforms, which are designed to encourage more annuity-style products in the market – investors have become increasingly concerned the state of earnings before interest and tax margin.

This was highlightedin a disappointing full-year resultfor the 2018 financial year, where EBIT margins fell by about 20 basis points in the June half.

While this was partly due to an increase in lower-margin sales in Challenger’s Japanese business – a factor that should stabilise in the coming years – the margin fall put into sharp relief the valuation questions around Challenger.

After the shares tanked 7 per cent in Augustfollowing the result, analysts were divided on whether Challenger’s multiple of about 16 times forward earnings was too high.

Following Wednesday’s share price crash, that multiple now sits around 12 times.

No doubt Howes is wondering at what level will the stock start to find support again.

Certainly volatile markets don’t help, and neither does the volatile regulatory environment. While Challenger sailed past the banking royal commission, it did take a hit last October when the government decided to delay the requirement for funds to offer Compressive Income Products for Retirement by two years to July 2022.

Investors will have plenty to ask Howes when he takes centre stage next month.

James Thomson

[email protected]

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