Challenger: Favorable Sales Mix to Benefit Margins

We maintain our fair value estimate for no-moat Challenger at AUD 7.30 per share, with shares mildly undervalued at current prices. The firm is effectively executing its strategy to grow higher-margin product sales in the early months of fiscal 2024. We anticipate earnings margins will continue expanding over fiscal 2024-2028—driven by a favorable shift in product mix and higher yields on investment assets, which should support further rerating of its shares. Continued expansion of institutional partnerships, such as its collaboration with Aware Super; and broader distribution efforts, including selling its products via platform operators like Netwealth, should help Challenger capture its fair share of the growth in the burgeoning annuities market.