When the Going Gets Challenging, the Challenger Gets Going; FVE Slightly Cut

We trim our fair value estimate on no-moat Challenger to AUD 8.80 per share (from AUD 9.30 previously) after reviewing the annuity provider’s near-term outlook, given significant market volatility resulting from the coronavirus pandemic. Global equity markets have fallen sharply since the start of 2020, with the S&P 500 and S&P/ASX 200 indexes down by about 17% and 25%, respectively. To cushion the ensuing negative economic impacts, the Reserve Bank of Australia has cut the official cash rate to 0.50%, and the U.S. Federal Reserve followed suit by slashing the federal-funds rate by 1% to a range of 0%-0.25%. The widespread investor risk-aversion impacts Challenger’s capital position, as its capital requirements depend on the riskiness of its investment portfolio. Meanwhile, its funds management business also stands to suffer from market volatility attributed to the pandemic. No surprises as Challenger recently lowered its normalised profit before tax, or PBT, guidance to around AUD 500-550 million (from the top end of range previously).