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Readers of this column know I base many stock ideas on demographic and social-trend analysis. The pick-up in Australian housing has inspired several ideas in the past 18 months, and this column has favoured two other key trends: the boom in Asian middle-class consumers and Australia’s ageing population.

I identified financial-services group Challenger as a key beneficiary of an ageing population as more baby boomers used its annuity products. I wrote briefly about Challenger for The Bull in November, and got splinters from fencing sitting.  

The other stock featured, Cogstate, a speculative life-science company has dropped from 36 cents to 28 cents since that column, but still looks interesting as an ageing population lifts demand for dementia testing.

With Challenger, I suggested waiting for better value when it was a touch over $6. It is now $7.76 and heading higher. Time to get off the fence and nominate Challenger as one of this column’s key ideas in the wealth-management sector.

Chart one: Challenger share price over one year

Source: ASX

Challenger has some terrific long-term tailwinds. An ageing population will lift demand for annuity products, of which the company is the market leader, as baby boomers seek securer retirement income, and a stronger culture of fixed interest and retirement planning builds.

Reports by the Treasury and the Financial System Inquiry identified annuities as a potential solution to Australia’s retirement-income challenge. Greater awareness around retirement planning and removing impediments to the stgelopment of retirement-income investment products would be a potential regulatory stgelopment for Challenger.

The group also has potential to build market share in related retirement-investment products, notably self-managed superannuation, reinsurance transactions, and other managed funds. Although the market mostly focuses on its potential in annuities, I believe Challenger can surprise in other areas and build more growth engines over time.

Credit Suisse last month lifted its share-price target for Challenger from $7.50 to $9.35 in one of the better pieces of stock analysis this year, describing it as a ‘lifetime opportunity’. I would not go that far, but if Credit Suisse’s target is met, Challenger will deliver a total shareholder return (including dividends) of more than 22 per cent over 12 months.

Credit Suisse wrote: “We expect the market to grow considerably over the medium term. As the leading annuities provider in Australia, Challenger is well positioned to capitalise on this opportunity with a strong brand and distribution capability … While the exact timing of earnings growth is difficult to forecast in the near term, the growth and value propositions presented by Challenger remain compelling.”

Macquarie Equities Research wrote in July that Challenger has the potential to beat FY15 and FY16 consensus analysis forecasts as it approaches the FY15 result.  Macquarie has an “outperform” recommendation and a 12-month share-price target of $8 for the company.  It said: A greater awareness around retirement income planning and potential structural changes to provide incentives and remove barriers to retirement planning is positive for Challenger.”

Consensus analyst forecasts have Challenger on an FY15 Price Earnings (PE) multiple of 12.4 times, and yielding 3.7 per cent. Three of five analysts in Morningstar’s consensus forecasts have a sell recommendation, one has a hold, and one has a buy.

 Challenger soared from a 52-week low of $4.15 to a 52-week high of $8.27, before losing some steam in recent weeks. The market may have underestimated the potential for further price gains, judging by several brokers have sell recommendations in consensus analyst forecasts.

Challenger looks like a good long-term holding for portfolio investors and Self-Managed Superannuation Funds. It may prove more profitable owning the “manufacturer” of these products rather than investing in its managed funds and other investment products.

But prospective investors need a multi-year horizon with Challenger. Its earnings can be lumpy, any regulatory changes are still unclear and a long way, and the valuation gap between Challenger and its nearest listed peers has narrowed after this year’s rally.

Risks aside, it is hard to think of a financial-services group that offers better exposure to one of Australia’s great defining trends: the ageing population.  

Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at August 7, 2014.