The Challenger Ltd (ASX: CGF) share price won’t be going anywhere on Monday after the annuities company requested a trading halt.

Why is the Challenger share price in a trading halt?

Challenger requested a trading halt this morning while it launches an equity raising which aims to further strengthen its capital position and provide flexibility to enhance earnings.

Challenger’s equity raising comprises a fully underwritten institutional placement of $270 million and a non-underwritten share purchase plan aiming to raise up to $30 million.

These funds will be raised at $4.89 per new share, which represents an 8.1% discount to the last close price of $5.32.

Management notes that the equity raising will further strengthen Challenger Life’s capital position during this period of ongoing market uncertainty. This will be achieved by initially increasing its regulatory capital position to 1.78 times APRA’s prescribed capital amount and its common equity tier 1 ratio to 1.17 times the prescribed capital amount.

How will Challenger deploy these funds?

Challenger intends to prudently and progressively deploy the capital raised. This will be primarily used in investment grade fixed income opportunities that are expected to be return on equity (ROE) accretive for shareholders.

Once fully deployed, Challenger’s defensive portfolio mix will be maintained, and the Life business’ prescribed capital amount ratio is expected to return to around the top end of its target range of 1.3 times to 1.6 times on a pro forma basis.

Managing Director and Chief Executive Officer, Richard Howes, commented: “Challenger is in a strong capital position with the raising further strengthening CLC’s balance sheet, and providing the opportunity to seek out compelling ROE accretive investment opportunities over time.”

“In response to the impact of ongoing market volatility, we have reduced capital intensity and maintained a strong capital position by repositioning the portfolio to more defensive settings. This has increased the cash and liquids we have on CLC’s balance sheet to over $3 billion,” he added.

One positive from the market volatility is that Challenger is seeing a lot of opportunities for it to deploy capital.

Mr Howes explained: “Following the pandemic market sell-off, fixed income asset risk premiums have widened significantly and we are now seeing opportunities, primarily in investment grade, to selectively invest this cash and liquids balance and generate pre-tax ROEs in excess of 20% on the capital backing these investments.”

“This is well above our pre-tax ROE target of the RBA cash rate plus a margin of 14%. Importantly, we can capture these opportunities, while maintaining our current defensive portfolio settings, with a high weighting to investment grade fixed income,” he concluded.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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In morning trade the Altium Limited (ASX: ALU) share price has come under pressure after the release of a trading update.

At the time of writing the electronic design software company’s shares are down 7% to $33.70.

What did Altium announce?

In May, Altium released an update and warned that its performance in the fourth quarter of FY 2020 was being impacted by the pandemic.

It was optimistic that the launch of attractive pricing and extended payment terms would drive volume in challenging market conditions.

However, while these initiatives are driving strong seat growth, management advised that the increase in revenue for FY 2020 will be short of consensus estimates.

This is the result of new lockdowns in China and an increase in COVID-19 cases in parts of the US, which are having an impact on Altium’s final sprint to the close of the financial year.

Management notes that historically, the company closes a significant amount of its second half business in the last two weeks of June. But this year, sales run rates in June are falling short of what would be required to achieve the market’s expectations.

Altium CEO, Aram Mirkazemi, commented: “Our strategy to support our customers and to increase volume under COVID-19 conditions through attractive pricing and extended payment terms is driving strong seat growth and will get us close to or just surpass our key target of 50,000 subscribers.”

“However, we are feeling the revenue impact of this strategy. While we are likely to deliver solid revenue growth, this will land marginally behind latest analyst consensus for the full year,” he added.

Commenting on the pricing and payments strategy, Mr Mirkazemi believes Altium has made the right move.

He explained: “We see Altium’s approach to COVID-19 pricing and extended payment terms as the right thing to do to support our customers in this challenging environment and to not lose momentum as we enter the next phase of growth.”

But these initiatives won’t be around for much longer, with the company increasing its prices again from 1 July. An Altium Designer one-year subscription will be $9,945 in July, compared to $7,185 at present. It will also remove the extended payment terms from 1 September 2020.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Altium. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The A2 Milk Company Ltd (ASX: A2M) share price hit an all-time record high of $20.05 last Thursday. Rather than pushing higher, its shares fell 4.23% on Friday. Could this be an opportunity to buy a2 Milk shares at a discount? 

What caused the sell off of a2 Milk shares? 

On Friday, the a2 Milk share price fell on no news, despite the S&P/ASX 200 Index (ASX: XJO) closing up 0.10%.

The slump could be attributed to the a2 Milk share price rising 10% during the week, with shares hitting $20 for the first time and the company reaching a record $14 billion market capitalisation. Rather than pushing higher, investors might have taken this opportunity to sell shares to lock in profits. 

Is the a2 Milk share price a buy?

It is a fragile time to be buying shares, given how much the market has run up. Not only is the US and South America struggling to contain the coronavirus, but there are increasing fears of a second wave across Europe, China and Australia. Quantitative easing and record money supply across the world has created a serious discrepancy between the real economy and the markets. It is difficult to tell if the markets will continue pushing, or if a correction is imminent.

Despite the inherent risks in the broader economy and markets, I believe the a2 Milk share price is fair value at today’s prices. The company has a strong track record of consistent growth and the coronavirus may incite further tailwinds for its revenues moving forward. 

a2 Milk provided the market with a trading update and FY20 outlook on 22 April. The update highlighted that the business has continued to experience strong revenue growth across all key regions, particularly in its infant nutrition products sold in China and Australia. a2 Milk’s 3Q20 revenue was above expectations – the company attributed this result primarily to changes in consumer purchase behaviour and impulsive pantry stocking. 

The company’s 2H20 earnings before interest, tax, depreciation and amortisation margin is also anticipated to be higher than previously expected. Expanding margins have been driven by higher revenue from higher margin nutritional products, partly due to consumer pantry stocking in 3Q20, favourable foreign exchange rate movement, and lower than expected costs for travel. 

The overall performance for FY20 should see ongoing revenue growth across its key regions supported by its significant investment in marketing for China and US. Notwithstanding the uncertainty, it anticipates revenue for FY20 in the range of $1,700 million to $1,750 million. This would represent a 30.4% to 34.2% increase on FY19 revenue. 

Foolish takeaway

If the broader market is sold off, then the a2 Milk share price will get dragged down along with it. While I wouldn’t be in a hurry to buy a2 shares, I believe the company is fundamentally in a good place and continued earnings momentum should be expected. 

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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