is this 12% divi yield a good investment?, page-2

Hi emc2,

Good to see I'm not the only person following this stock!

Agree that the dvd yield looks attractive. They have guided for 7c 1H11 but unfortunately have not guided for anything beyond that. I believe they are currently conducting a review of their business and I would imagine that this might include cuts to the dividend amongst other potential outcomes.

I am a big fan of both of their businesses but my main issues are around cash, operating structure and the valuation effects of the recent FX moves.

To look at the businesses:
Inexus:- performing well despite the depths of the UK housing market slump. The order book still looks strong and will benefit from an (eventual) rebound in UK housing starts. Even if the rebound in housing starts is delayed the order book should support near term earnings. Growth may also come from installing more efficient heating systems or broadband Internet into new homes. Debt rollover isn't until Aug 2012. Will need capex injections to expand eventually I would imagine.

LBC: - Has been more exposed to macroeconomic conditions but that will drive upside if/when conditions change. Has a huge underutilised landbank in key strategic hubs. They have identified 26 growth projects and want $100US to develop them. CIF have allocated $80m AUD to this in their most recent presos. They are actually going to be benefitting from recent the FX moves here!

Cash: - they had $219m in June. $46m of this is going to dvd & management fees, whilst $80 is for LBC capex. That leaves $93m for future dvd's, to pay management fee's and to fund any Inexus capex. So with nothing else changing they can only pay the 14c dvd for 2 more years before running out.

FX: - the sensitivities are on page 74 of the AR. It is not a pretty sight at the moment but shows the mains risks are AUD/GBP & AUD/EUR. The USD movements are a relatively small proportion of the risks.

Capital structure: - both of their businesses are in the growth stage and are thus much more likely to require capex in the next few years than to pay distributions back to CIF. That capex will need to come from somewhere. Challenger own around 40%, plus Deutsche Bank with 20% (top 4 holders own ~70%). Will they be willing to inject extra funds?

As for what happens next, I guess that's where the risk/return comes from. There is a substantial discount to NAV even taking the FX adjustments into account. I can't really see many compelling reasons for this company to remain listed on the ASX, as the key assets are overseas and it will probably be hard to raise equity capital to fund them in Australia. However, Challenger have resisted moves to wind-up before and may choose to do the same again. I imagine they have their own investment return hurdles and will stay invested whilst these are met.

For me, it's a good hedge to other positions in my portfolio that are currently benefiting from a rising AUD and I'm happy to slowly accumulate at the moment with a medium term view. I am not expecting the dividend to remain though and am buying with that in mind.

All IMO. No advice given...