Hi KAILASH and other CGF fans,broker research from the 18th...

Hi KAILASH and other CGF fans,
broker research from the 18th Jan.
...........................................................................

Challenger Financial Services Group

Recommendation: Accumulate

Risk: Medium

Guilty by Association? MFS Convertible Note

Exposure Over-Done

Price Target: A$6.92

• Amid general market weakness across the non-bank financials
sector yesterday, concerns over a potential exposure to MFS
saw CGF down 7.3% yesterday. We note:

1. CGF’s High Yield Fund, which manages third party
money, holds an A$36m MFS convertible note.

2. While MFS’s spectacular 69% fall yesterday will have
generated a mark to market loss on the bond, the note is
convertible at the option of the holder – it is not a
mandatory conversion – with equity risk being managed
by shorting the underlying physical to allow for partial
difference between the mark-to-market value of the
bond and the potential value of equity if the option to
convert to equity is exercised.

3. CGF does not have any exposure to this instrument. In
terms of CGF’s exposure to hybrid-type instruments that
exhibit equity conversion characteristics, we estimate
that less than 1% of CGF’s asset allocation in the Life
company is invested in these type of instruments.

• Our December 2008 sum-of-the-parts valuation is A$6.92 per
share. The risk to this price target is that recurring takeover
speculation proves correct, or future growth in funds /
mortgages under management and the reallocation of
investment assets to higher yielding asset classes is more rapid
than we have forecast.