Challenger Ltd
THE last time we wrote about Challenger, it was under enormous pressure because investors were uncertain whether the company's life division needed extra capital to satisfy the demands of industry regulator APRA under LAGIC (Life and General Insurance Capital).
Challenger sells annuity products backed by long-dated investments. Despite the company's reassurances about sufficient capital, the share price has continued to slide, underperforming the overall market by about 30 per cent over the past 12 months.
On the face of it Challenger is incredibly cheap, trading at about 0.8 times book value and on a price-to-earnings multiple of about 5.5 times forecast earnings. Most industry analysts believe the stock is worth 25 per cent to 30 per cent more. So why is the stock floundering? Some argue lower interest rates make annuities less attractive. Others believe the catalyst will be a confirmation by APRA on the capital position, together with a buyback of stock by the company. The stock could motor higher quickly, so watch carefully, with the AGM coming up on November 26.
Wotif.com and Webjet
HAS the time come for these two businesses to seriously talk about merging? Wotif is predominantly an online accommodation booking agency with a developing online flights business. By contrast, Webjet is a flights booking agency, moving aggressively into the accommodation area. In a small market the two major domestic online players seem to want to step on each other's toes.
Webjet recently launched its latest flight and accommodation package offering, while Wotif, struggling to get earnings growth, increased the commissions it charges accommodation owners. Both seemingly have entered a lower growth phase.
Wotif, with a market value of about $1 billion, is much bigger than Webjet at $270 million and needs to be the instigator of any talks. For several years now Wotif has ignored Webjet, believing its business model of charging customers a booking fee to source the cheapest domestic plane flights was flawed. In the meantime, Webjet's earnings have powered higher and Wotif has been forced to start its own flights business.
An opportunity for merger talks may emerge with the pending departure of Wotif CEO Robbie Cooke. The new Wotif boss may believe it is better to get into bed with Webjet to fend off large offshore players in the online market, such as Expedia and Priceline. The decision by Wotif to raise the commission rates paid by hotels over the next two years has seen the share price spike but investors are still concerned the company has already gone ex-growth and needs to grow the top line to justify its price earnings multiple of about 18 times.
Premier Investments
MOST of the major apparel retailers will be giving the sharemarket updates in coming weeks. The word on the street is October was a much-improved month for the industry, breathing some optimism into stock prices.
If apparel spending has started to bump up in Australia some of the big beneficiaries would be Myer, David Jones, Pacific Brands and Premier Investments. We should all keep a close on the commentary because these beaten up stocks can move quickly on any positive news.
Interestingly, shares in Solomon Lew's Premier have already risen 41 per cent since June, with its shareholding in Breville soaring and improving results from the retail division under Mark McInnes. For some time there have been suggestions Lew is keen to make a major acquisition. No such move has been forthcoming.
However, a strange item appeared in the most recent Premier accounts. During the six months to the end of July, the group invested $21 million in a financial instrument that delivered a profit of slightly more than $4 million. At the time of the books being ruled off, the value of the instrument had shrunk to just below $17 million. The accounts failed to disclose what the instrument pertained to.
Some pundits believe it could have been the purchase of an option or some derivative product over another retailer. Top of the list is McInnes' old company David Jones, which enjoyed a major spike in its share price when it received some takeover interest from little-known UK based EB Private Equity.
Frequently Asked Questions about this Article…
Why has Challenger's share price fallen even though the company says it has enough capital?
The article says Challenger has been under pressure because investors remain uncertain about the life division's capital needs under APRA's LAGIC rules. Shares have underperformed the market by about 30% over the past 12 months. Other factors cited include lower interest rates making annuities less attractive to customers, which also weighs on investor sentiment.
Is Challenger cheap right now based on valuation metrics?
According to the article, Challenger is trading at about 0.8 times book value and roughly 5.5 times forecast price-to-earnings, which many analysts see as cheap. The piece notes most analysts believe the stock could be worth about 25–30% more, although the market is waiting for confirmation on capital and other catalysts.
What catalysts could push Challenger's stock higher in the near term?
The article identifies two main potential catalysts: a clear confirmation from APRA on Challenger's capital position under LAGIC and a company share buyback. It also points out the company's annual general meeting on November 26 as an event investors should watch.
How do interest rates affect Challenger's annuity business and investor outlook?
The article explains that Challenger sells annuity products backed by long-dated investments, so lower interest rates can make annuities less attractive (reducing margins or demand). That sensitivity to rates is one reason investors have been cautious about the stock.
Are Wotif.com and Webjet likely to merge, and why would that matter to investors?
The article suggests merger talks could make sense because Wotif (about $1 billion market value) and Webjet ($270 million) are moving into each other's core areas—accommodation and flights—and face competition from offshore players like Expedia and Priceline. A CEO change at Wotif might make talks more likely, but any deal would need Wotif to instigate negotiations given its larger size.
What did Wotif's decision to raise commissions mean for its share price and growth outlook?
As reported in the article, Wotif raised commissions charged to accommodation owners over the next two years, which caused a share-price spike. However, investors remain concerned the company may have already entered a lower-growth phase and still needs top-line growth to justify a price-to-earnings multiple of about 18 times.
Which apparel retailers could benefit if consumer spending improves, according to the article?
The article says October looked like a much-improved month for apparel and that beaten-up stocks could move quickly on positive news. Potential beneficiaries listed are Myer, David Jones, Pacific Brands and Premier Investments, with investors advised to watch upcoming market updates from major apparel retailers.
What is the mystery around Premier Investments' $21 million investment mentioned in the article?
The article notes Premier invested $21 million in a financial instrument that delivered a profit of just over $4 million, but by the time the books were closed its value had fallen to just under $17 million and the accounts did not disclose what the instrument was. Pundits suggested it could have been an option or other derivative tied to another retailer. The piece also mentions Premier shares have risen about 41% since June, helped by its Breville holding and improved retail results.
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