Challenger Ltd (ASX: CGF) shares had a day to forget on Tuesday.
The ASX 200 stock ended the session 9% lower at $5.58 after investors responded negatively to its half year results.
This latest decline means that the annuities company's shares are now down 26% from their 52-week high.
One leading broker believes this has created a buying opportunity for investors and is urging them to snap up Challenger shares while they are down.
According to a note out of Bell Potter, its analysts felt Challenger delivered a solid result. They said:
Overall, we thought this was a good set of results, with 3 key positives in the operating metrics, and a negative which we see as non-cash accounting/timing issues.
The positives were as follows:
+1/ Cost control is delivering results, with costs down in absolute terms (despite inflationary pressures), and the cost/income ratio at 32.0% compared to 34.6% a year ago and a downward trend since 39.5% in H2 FY22. This contributed to an improvement in underlying results. +2/ ROE, the normalised group ROE was 11.6% up 1.2%, and ahead of target of 11.2%. This was the first time it was ahead of target since H1 FY22. +3/ Retail life annuity sales hit a record level at $583m, vs $469m a year ago (and $221m 3 years ago in H1 FY22).
The one negative which Bell Potter has identified relates to the ASX 200 stock's asset and liability experience. It said:
-1/ The asset and liability experience (below operating line) was -$149m, much in line with the -$145m last year but consensus was expecting -$24m. This was attributed to $61m of timing differences due to new business strain and AASB17 life risk accounting, $48m to lower property returns (lower valuations), and $102m attributed to lower expected returns on absolute return funds, compared to assumptions, plus other smaller movements.
Bell Potter believes that the selloff that followed the release of Challenger's results was "out of place" and that investors should take advantage of this by picking up shares. It said:
In our opinion, the share price reaction (down 9% or $350m off market cap) seems out of place and does not reflect the underlying/operating performance of the business, in terms of growth in new business, controlling costs or asset returns. The outlook statement was confident, and guidance maintained. The accounting issues are noncash, largely relate to timing and should reverse over time. Our Adjusted EPS forecast decreases by -4.8% for FY25 and by -2.2% for FY26 but increases by 4.1% for FY27. We reduce our price target 5.5% to $7.80 but maintain our BUY recommendation.
As you can see above, Bell Potter has retained its buy rating on the ASX 200 stock with a trimmed price target of $7.80. This implies potential upside of 40% for investors over the next 12 months.
In addition, a 5.1% dividend yield is expected in FY 2025, boosting the total potential return to approximately 45%.
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