After reporting strong annuity sales for the first quarter, analysts fear that Challenger’s real estate exposure and reliance on financial advisers could hurt the group’s profits.
This week ASX-listed Challenger Limited announced that it grew total AUM to $81 billion. The group recorded its second-highest quarterly annuity sales with a total of $1.2 billion over the three-months, up 7 per cent.
“Continued growth in annuity sales reflects strong demand for secure income from the growing number of retirees with increasing retirement savings. Annuity sales are also benefiting from Challenger’s expanded distribution reach,” the group’s CEO, Brian Benari, said.
However, Challenger’s funds management inflows were weak with just $300 million for the quarter, taking total FUM to $78.2 billion.
The combination of strong annuities sales and weak FUM inflows has led Morningstar analyst Chanaka Gunaesekera to forecast a modest 1.6 per cent increase in Challenger’s fiscal 2019 NPAT to $439.5 million.
“We think Challenger’s longer-term tailwinds are intact, but there are some short-term concerns that may weigh on investor sentiment. In particular, a potential fall in Australian property prices,” Mr Gunaesekera said.
“It’s primary exposure to property includes equity interests in commercial property and to residential mortgage-backed securities in its fixed-income portfolio,” he said.
Challenger has already begun reducing its equity positions in property and increasing its allocation to higher-grade fixed-income assets, Mr Gunaesekera noted.
Another concern for the Morningstar analyst is the higher interest rates in the US compared to Australia, which facilitate higher yields on US annuities relative to their Aussie counterparts, negatively impacting Challenger’s annuities sales in Japan.
While Challenger has escaped the wrath of the Hayne royal commission, unlike many of its competitors operating in the retirement savings sector, its increasing reliance on financial advisers as a distribution channel could pose risks.
This week Challenger announced a distribution deal with platform provider Netwealth; its products will soon be available on platforms used by more than 70 per cent of financial advisers in Australia.
“Sales may be indirectly impacted if part of the aftermath of the commission is that fewer people seek out financial advisers, given that Australia’s financial advisers are the major distribution channel for selling annuities,” Mr Gunaesekera said.
However, he noted that Challenger may also indirectly gain from the royal commission.
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