Challenger (ASX:CGF) share price dips after revised capital measures

Enhanced risk settings reduce targeted pre-tax return on equity by 2% to RBA cash rate plus 12%.
The post Challenger (ASX:CGF) share price dips after revised capital measures appeared first on The Motley Fool Australia. –

It appears the investment management company’s investor day presentation hasn’t done the Challenger Ltd (ASX: CGF) share price any favours.

After closing yesterday at $5.65, the Challenger share price dipped by 5.31% to $5.35 in early morning trade. It has since rallied and, at the time of writing, shares are swapping hands at $5.49, down 2.9%.

Let’s take a look at what details were shared with investors this morning.

Why is the Challenger share price falling?

Investors have been selling out of the retirement-centric asset manager today following the release of its investor day presentation.

Challenger reaffirmed its FY21 guidance will be at the bottom end of its $390 million to $440 million range. This information had already been shared towards the end of April, sending the Challenger share price 20% lower in a week.

Management provided an update on its strategy and outlook following a period of disruption.

As a capital measure, Challenger has revised its targeted prescribed capital amount (PCA) from 1.45 times to 1.6 times. The increase in the risk setting will dampen the fund’s return on equity by roughly 2%.

As a result, the company also revised its pre-tax return on equity target to the Reserve Bank of Australia cash rate plus 12%, down from plus 14%.

Commenting on the change, Challenger CEO and managing director Richard Howes said:

Our strategy to grow sees us building further on our already strong retirement brand and customer franchise. It’s essential we protect this valuable asset to support our long-term growth and success. To this end, we are enhancing our risk settings, reflecting our commitment to maintain our strong capital position.

Fundamentally, this means the fund manager is reducing the risk exposure of its fund by keeping more cash up its sleeve. However, less risk means less potential reward for those retirees.

Looking to FY22

The company’s normalised net profit before tax guidance for FY22 has failed to put the Challenger share price in the green. An estimated range between $430 million to $480 million was provided by the fund manager.

Management believes the midpoint of $455 million represents their best estimate. The FY22 forecast represents a 17% increase compared to FY21.

Despite the positive estimate, Challenger’s share price is struggling to find its footing today. However, the company’s shares have rallied 11.68% in the past month.

Listed investment company, Wam Leaders Ltd (ASX: WLE) added the annuity business to its portfolio back in April.

The post Challenger (ASX:CGF) share price dips after revised capital measures appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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