Challenger (ASX:CGF): Are investors panicking too much?

Shareholders in Challenger (ASX:CGF) didn’t take the news of Apollo’s sell down well. Apollo, a global fund manager, sold half of its shareholding – cashing out a $460m stake worth just over 10% of the company. Yes, it isn’t a sign of confidence, but was the re-action overblown for an ASX company?

The concern is that this trade might not be the end of the relationship between the two companies. Apollo is not just an investor in Challenger but a provider of certain products that Challenger distributes. We believe investors are thinking this relationship is under threat.

Challenger (ASX:CGF): A fundie for retirees

Challenger’s specialty is lifetime annuities, providing retirees with guaranteed regular income payable for life. These are the perfect solution because they accelerate with inflation, along with beneficiary needs. They also don’t crash when the stock or bond markets do. 3-year fixed annuities are priced attractively and tend to outperform conventional Term Deposits.

Challenger also provides allocated pension and superannuation products. This is a terrific space to be in, not just because the Baby Boomers are retiring but because they will live longer than previous generations, and also because they have among the highest life expectancies globally. Oh, and did we mention Australia’s superannuation system? This ensures there is some money to splash around in retirement, although the challenges is managing it. And Australia’s superannuation assets are expected to nearly triple to over US$9tn by 2042.

In FY24, Challenger made a $608m profit before tax and a $130m profit after tax (up 17% and down 24% respectively compared to restated FY23 results, although the company’s EPS was up 14%). It closed the year with $127bn Assets Under Management and a 15.6% Return on Equity.

The company has told investors to expect an FY25 post-tax profit of $440-480m on a normalised basis and a $640-700m profit before tax, assuming a 31.3% tax rate. It has an ROE target of the RBA cash rate plus a margin of 12%, and told investors this would be achieved in FY25.

Shares were up 15% in 12 months…until the past week.

Challenger (ASX:CGF) share price chart, log scale (Source: TradingView)

But is the company’s relationship with Apollo over?

Apollo cut its stake in Challenger from 20.1% to 9.9%. This has led to fears that the relationship between the two is over. Apollo is not just an investor in the business, but the pair are business partners with Challenger having exclusive distribution rights over Apollo’s Aligned Alternatives Strategy, and investing in Apollo’s private markets and private equity strategies. The company has tried to reassure investors that these initiatives would continue, but these fell on deaf fears.

It is not unreasonable to ask why Apollo would be selling if it saw a further opportunity for growth. Indeed the words used in the release to the ASX said it all. ‘Apollo’s decision to reduce its ownership in Challenger supports [a] redeployment of capital to other growth opportunities,’ the pair of companies said. The largest shareholder is now MS&AD Insurance Group Holdings which has a 15.1% stake. It too has a distribution partnership that was extended for five years in May 2024.

To answer the question, it does not appear that the partnership is over at this point in time. Nonetheless, it is a bad look for Apollo to be selling out as it indicates a lack of confidence in the company. You cannot rule out the possibility of the partnership being cut, and when it happens (whether next month or not until the next decade) it will be announced as suddenly at this news was.

Challenger is oversold right now

But all things considered, the sell off has been overdone. Analysts covering Challenger have a mean share price of $7.97, with 14 estimates ranging from $7 and $8.80. Although it has been a tough time to be an ASX-listed fund manager of late, Challenger is different because of its focus on annuity products whilst others focus on more risk-prone products such as equities.

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