Challenger a buy at these prices, page-42

Another party is understood to be circling listed financial company Challenger in addition to The Carlyle Group, which was earlier known to have an interest.It is understood that another party has been making efforts to make contact with the $2.4bn Challenger, although is understood that phone calls have not been returned.While the identity of the party remains unclear, one possibility is a major private equity firm such as Kohlberg Kravis Roberts, Blackstone or Apollo, through its investment in retirement saving product company Athene.READ NEXTCORRUPTION INQUIRYWaterhouse link in ICAC probeMAX MADDISONThe financial services space is a happy hunting ground for private equity right now, with KKR buying a 55 per cent stake in CBA’s wealth manager Colonial First State for $1.7bn in May.Challenger’s major shareholder, MS&AD, has always been discussed as a possible suitor, and some experts say it would be the group most likely to work in conjunction with a private equity firm.Other possible candidates are Macquarie Group and Magellan Financial, which has been eager to gain exposure to annuities.Carlyle is also understood to have run the ruler over Challenger about three years ago, as well as recently, while earlier, NAB and Macquarie were believed to be suitors.The attraction for Carlyle is that it has a credit fund up and running and Challenger’s credit team is considered one of the best.More than 10 years ago, Japan’s Nomura had an interest.Before the onset of the COVID-19 pandemic this year, Challenger’s share price was above $10. Now it is $3.64.Japan’s MS&AD owns 14.95 per cent and did not participate in a recent equity raising after buying into the stock at $12.The other major investor, with a 14.64 per cent stake, is Caledonia Investments.Because Challenger has to mark to market their securities, the company has had to make writedowns worth about $750m due to the dislocation of global debt markets amid the pandemic.But the decline in value is only in theory, because if the securities are held for the full term, the original value remains.It means that an acquirer could offer a $750m premium for the business and would still effectively be securing the company at a bargain price.Challenger has a booming funds management operation that includes its highly successful Fidante business, and the $81.4bn it has under management is being grossly undervalued by its share price. But the earnings from its life insurance operations have fallen because of the decline in the number of financial planners selling its products.Another factor as to why Challenger’s share price is lagging is that Australians grossly underinvest in annuities and overinvest in equities.Analysts from Bell Potter estimate that Challenger’s value in a break-up is $2.82bn, taking into account an effective tax rate of 30 per cent, or $4.61 a share.They estimate its life insurance business would be worth $2.67bn, based on a multiple of nine times earnings, its wealth business $608m based on 15.5 times and its corporate division at negative $452m based on a 10 times.