Why has the share dropped., page-56

@Warrior2spirit

Welcome to HC, and to the CGF threads.

Yes, the delay in the CIPR framework implementation is likely to be one of the main drivers, and I do agree that it is only a delay, rather than a loss of future revenue (although, in NPV terms, it still makes a difference).

The point that I think needs to be made is that, with or without CIPRs, CGF can still grow their normalised NPAT at a ~10% annual rate (or even higher), for the foreseeable future; and that is an above-market earnings growth rate, for a business that is virtually uncorrelated with the broader economic cycle.

So, if you think that CGF is currently trading at PE multiple of 12.8x (relative to its FY19E normalised NPAT), while the ASX200 is on a PE of 14.3x (relative to FY19E index EPS), one of the following must be true:

1) CGF is undervalued, relative to the broader market.
2) CGF’s future earnings growth is going to be a lot lower than the current ~10% pa.

In order for the latter to be true, in the medium/long term, CGF’s annual annuity sales would have to decrease materially (i.e. exhibit negative growth) over the next few years.

The reason is that nearly 50% of CGF’s annuity book is expected to mature over the next three years, and to be replaced by new annuities with a longer average maturity; therefore, once this short-dated bucket of annuities has rolled off, CGF’s Life Cash Operating Earnings is likely to experience above-average growth even at constant annual annuity sales, simply thanks to the change in the maturity mix.

This is not a given, since the annuities rolling off could in theory be replaced with new short-dated annuities, in such a way that the maturity mix remains unchanged, but it seems very reasonable to assume that the average maturity of the annuity book will increase.

With CGF commanding a >70% share of the Australian annuity market, and given the secular uptrend in superannuation/retirement assets, such a drop in annuity sales seems rather unlikely.

So, if it is unlikely that CGF’s normalised NPAT trajectory will significantly undershoot its current ~10% annual growth rate, it must be the case that CGF is currently undervalued vis-a-vis the broader market; and in absolute terms as well, given that the ASX200 itself is trading below its historical PE average of ~15.0x.

IMHO & DYOR