Amongst the wider market sell-off, the Challenger Ltd (ASX: CGF) share price fell 34% in 2018.
Challenger is an investment management firm that can be split into two main businesses: Life and Funds Management. Challenger's Life division offers annuities which cater to people in retirement. The company is Australia's leading provider of annuities, servicing more than 60,000 people who want or need reliable income streams.
Despite a poor 2018, I believe that Challenger can have strong share price appreciation in 2019 and beyond.
Challenger is the top dog in the Australian annuities market. The company's products dominate the industry with approximately 90% market share. Even if Challenger can only maintain its current market share, the company should grow earnings over time. This is because of two tailwinds: Australia's changing demographics and superannuation.
An investment theme that is impacting industries ranging from healthcare to funeral services is Australia's aging population. Baby boomers have been turning 65 since 2011 and will continue to do so until 2029. This will result in the number of retirees over 65 growing 40% in the next decade. As more people enter retirement they will need to live off income streams such as annuities.
The government has identified this and as a result they have made it a requirement that all Super funds offer guaranteed income products.
The 9.5% Superannuation Guarantee means that the pool of funds in Super accounts keeps growing. The mandatory rate of contribution is also increasing to 12% in FY26. This will further accelerate the volume of funds that can be transitioned into annuities.
Another positive for Challenger's stock is its valuation. The company currently trades at 18x earnings. This is slightly above the market average of 16/17x earnings. Considering the Superannuation and demographic tailwinds impacting on the business, I believe that this is very reasonable.
Foolish takeaway
Not many businesses boast the tailwinds and government support that Challenger currently enjoys. Policies can change over time, however as healthcare improves and the baby boomer generation matures we will continue to see a growing population of retirees. Challenger is the leader in annuities and stands to benefit most from this trend. The company's share price should do well over the long term.
