Challenger shares surge on upbeat outlook

Challenger shares jump 12 per cent after it said it was on track for an annual result at the top end of guidance.

Challenger CEO Richard Howes. Picture: Jane Dempster.

Challenger shares have soared after the annuity group said it would report an annual pre-tax profit at the top end of its $500m-$550m guidance range and had made “significant” progress on its strategic priorities in the December half-year.

Announcing a statutory net profit of $220m, up $214m, chief executive Richard Howes said Challenger would continue to perform well despite the disruption to the advice industry caused by the financial services royal commission.

“The ongoing execution of our carefully planned strategy, together with our response to industry disruption, has put Challenger in a good position to optimise performance in the current environment,” Mr Howes said.

“Challenger continues to prove to be resilient.

“Our business model, leading brand and diversified distribution have ensured we can continue to deliver solid earnings despite significant and ongoing challenges in our operating environment.”

By early Tuesday afternoon, the stock had spiked $1.11, or 12.5 per cent, to $9.98, as investors welcomed an unchanged 17.5c interim dividend and a commitment to maintain the full payout at 35.5c.

While the dividend payout ratio of 53 per cent was above the board’s 45-50 per cent target, Challenger said this reflected its $1.5bn in excess regulatory capital and confidence in future growth.

Citi analyst Nigel Pittaway said the half-year profit was about 5 per cent ahead of his expectations, and the upgraded guidance could still prove to be conservative.

“The stock has rallied into the result but we nonetheless expect it to trade up,” Mr Pittaway said.

While sales in the life business lifted 15 per cent to $3.1bn, the impact of disruption was evident in the 24 per cent fall in domestic annuity sales to $1.5bn.

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Of that figure, the value of term annuities retreated 16 per cent to $1.3bn due to industry and adviser disruption, with lifetime annuities slumping 52 per cent to $200m due to new means testing rules.

Japanese sales by MS Primary were up $300m to $500m.

Other life sales almost doubled to $1.2bn, reflecting strong demand from institutional clients for guaranteed returns in a low interest-rate environment.

Challenger said the annuity book continued to shift towards long-term annuities, which now accounted for more than one-third of annuity sales and pushed the tenor of new business sales to more than nine years.

The long-term annuity book was now the same size as its fixed-term counterpart, underpinning future earnings.

Challenger said it was responding to the ongoing industry disruption by investing in a number of growth initiatives, including more direct engagement with potential customers, an increasing level of support for advisers and partnering with institutional clients.

As part of this, the company said it would invest up to $15m this year in a range of distribution, product and marketing initiatives to capture growth as the retirement income market evolved.

“While disruption in the retail advice market is expected to be ongoing, Challenger’s strong brand and reputation, and diversified distribution networks, has supported the resilience seen in the business across the half,” the group said.

The life business’s earnings before interest and tax was up 3 per cent to $286bn, with the 7 per cent EBIT increase in the funds management unit to $28m driven by a 5 per cent boost in funds under management to $81.1bn.

The group’s normalised pre-tax return on equity was 15.2 per cent - 30 basis points above the target announced last June equal to the Reserve Bank’s cash rate plus a margin of 14 per cent.

Challenger said it was on track to meet its ROE target for the full-year.