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shaw stockbroking has a $7.30 target on CGF

BUY
Risk: HIGH
Price ($ps) 6.45
Target Price ($ps) 7.30
Market Cap ($M)
GICS Sector Diversified Financials
52 week Hi-Lo ($ps) 8.27 - 5.81
Daily Vol (M, mth avg) 2.1
Weight of S&P 200 Index (%) 0.23
Forecast Total Return (%) 17.7

Event
CGF has announced its 1H15 result, with strong growth in retail annuity
sales, up 19% to $885m and a normalised profit of $155m. Management
reconfirmed cash operating earnings for life business of $535m-$545m. We
lower our forecasts due to weaker funds management profit and higher
share count. We lower our forecasts as follows: -6% 2015, -5% 2016, -5%
2017. We raise our price target slightly from $7.15 to $7.30.
Highlights
 Life annuity sales were $2.1b, up 22% on pcp, with record retail sales of
$1.6b, up 8%, and institutional sales $549m. Management is targeting a
net retail annuity book growth of 11%-13% (down from 12%-14%
previously) - to account for the lead time associated with developing the
new Care Annuity product (with Care Annuity suspended in November).
 Reconfirmed Cash earnings target of $535m-$545m for FY15. Achieved
cash operating earnings of $258m, up 9% on pcp. EBIT $216m, +8% pcp,
with operating earning benefiting from improved asset sales, which were
partially offset by higher expenses in distribution and asset origination
initiatives.
 Life had an average of $11.6b under management, up 9% on the pcp, with
a spread of 4.4%, down 10bps on prior period.
 The low interest rate environment has helped drive record annuity sales
as retirees look to manage cash flow and maintain capital. This is likely to
continue to grow with the number of retirees higher, and increasing
acceptance of outcomes based retirement planning within the
superannuation industry.
 Cost to income ratio of 34.4%, an improvement of 20bps on prior period
and well within management target range of 32%-36%.
 Interim dividend up 16% to 14.5cps. Management reconfirmed
expectations for 45%-50% payout range and full franking in the second
half.
Recommendation
Upgrade to BUY. We liked the result, the two indicators we look at are
annuity sales (+19%) and margins (stable). Further, we expect annuity sales
to continue at a strong rate for several years into the future. We do expect
margin contraction as higher yielding assets are rolled off, however, this will
be offset to an extent by lower interest paid to annuitants. We assume
30bps spread contraction (and 50bps asset yield compression) in our
forecasts for 2016 and 2017. We have the underlying asset yield falling from
6.4% to 5.4% over two years.
With strong demand for annuities, we think CGF is in a good position to
manage it margins. The key risk is a default in the investment portfolio,
which is highly unlikely at this stage of the cycle. The stock is cheap, at 11x
2016 earnings in a market on 16x.