UBS: Challenger Group - Business Growth continues to exceed...

UBS: Challenger Group - Business Growth continues to exceed expectations
27/06/2007













Challenger Group
(CGF.AX – A$5.85)
Buy 2 Target:6.75
Business Growth continues to exceed expectations

Event: Asset Management divisional update:

CGF provided a positive update on its Asset Mgt business, which accounts for c60% of group EBIT. The update highlighted (1) CGF’s diverse funding sources on and off-balance sheet, (2) strong business growth – particularly in off-balance sheet Specialist Funds ($3.5bn from $0.6bn 1 yr ago), and (3) asset class exposures and expertise.
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Impact: Confirms MetLife deal, zero consideration:

CGF confirmed that it expects to close the MetLife portfolio acquisition at the end of July 2007. This (1) doubles the CGF annuity funding pool from $2bn to $4bn (2) provides scale for asset investment opportunities (3) supports growth in the fee-based specialist funds business, and (4) supports a strong 3-yr earnings growth outlook.

Action: Material earnings upgrades, but not just from MetLife:

We have upgraded 2-3yr earnings forecasts significantly: 10% in 09E. This is driven by the deployment of MetLife, as well as higher Specialist Fund FUM driving increasing fee income streams.

Valuation: New SOTP-based $6.75, Buy 2 rating unchanged

Key positives: (1) strategy and rollout accelerating (2) step change potential in MetLife (3) earnings upside potential. Key risks: (1) Mortgage Mgt spreads (2) Asset contestability (3) asset realisation unpredictability (4) strike rate on deals.