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Why the Challenger share price crashed on Tuesday

We examine why the investment management firm saw its stock sold off sharply on Tuesday.

The Challenger share price crashed on Tuesday after the company released, what was received as a lacklustre Q3 trading update.

Company profile: Challenger Limited (ticker: CGF) is an investment management firm, with assets under management in excess of $100 billion. The firm is the largest provider of annuities in Australia.

Investors look to be disappointed by Challenger’s pre-tax, FY21 profit guidance, which is now forecast to come in at the lower end of the previously guided $390 million to $440 million range.

Management attributed this expected profit performance to weaker credit spreads in FY21, which according to the firm, ‘is not fully reflected in customer pricing’.

As a result of this, Challenger said it would respond by ‘significantly adjusting annuity pricing.’

For those reading the fine print, investors may have been concerned that Challenger will undershoot its new, more moderated expectations. Footnote 7 of the Q3 release noted:

‘The covid-19 situation and its impact on markets create an inherently uncertain environment. This could, among other things, impact the speed of deployment of Life’s capital and therefore impact guidance.’

Challenger Share Price Falls

By 1:31 PM the Challenger share price was down 14.09%, to $5.67 per share, as investors sold-down the stock heavily. CGF closed out the session down 15.76%.

This marks a distinct reversal for the stock, with CGF up a little over 40% before the Q3 announcement hit.

Despite this sell-off, analysts from Macquarie reiterated their Neutral rating and $6.30 price target on the stock, while saying:

‘We continue to like the long-term growth thematic, coupled with the capital benefits of the acquisition of the bank licence, however at present valuation looks fair.’

Other Points of Interest

Mind you, while the market responded poorly to this guidance, the Q3 trading update highlighted a number of positive developments.

Chief among them was Challenger’s assets under management, which rose 8% in the quarter to move past $100 billion for the first time.

This, said the firm, was driven by ‘Life annuity book growth' as well as 'a continuation of market leading Funds Management net flows.'

Specifically, Life's net flows in Q3 came in at $1,377 million, notching up record book growth of 9.2% in the process.

Total Life sales were $2,419 million (+155%), while total annuity sales came in at $979 million (+165%). Annuity sales growth, management said, was driven by 'strong growth in domestic term annuity sales' but 'partially offset by a moderation in the contribution from Japan.'

Secondly, looking at Challenger’s funds under management, the firm reported healthy growth driven by $7.0 billion in net flows and buoyant market conditions. Challenger’s FUM currently stands at $99.7 billion.

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