As market analysts continuously seek undervalued opportunities within the S&P/ASX 200 Index (ASX: XJO), two shares have emerged as potential growth candidates this September. According to experts from the brokerage firm UBS, these stocks, although not among the most prominent names on the ASX, are worth close attention.
Challenger Ltd: A Dominant Force in Annuities
Challenger Ltd (ASX: CGF) is identified by UBS as a diversified financial services company with a strong foothold in the retirement income market. The company operates through two main segments: Challenger Life, which focuses on selling term-based and lifetime annuity products, and a funds management division that includes in-house investment management and minority equity stakes in external boutiques such as Fidante Partners.
UBS has rated Challenger as a “buy,” setting a price target of $9.30, indicating a potential 6% increase in share value. Additionally, Challenger is expected to offer an annual dividend per share of 31 cents in the 2026 financial year.
The positive outlook for Challenger is bolstered by strong FY25 fourth-quarter annuity sales and improved second-half spread margins, which suggest a favorable trajectory for the life segment. Following the FY25 results, UBS has upgraded its earnings per share (EPS) estimate for FY26 by 4%, aligning with Challenger’s guidance mid-point.
UBS continues to see potential positives from new APRA capital standards due partway through FY26, potentially boosting return on equity (ROE) by 150 basis points while also reducing volatility.
The brokerage firm concludes that with a more normalized yield curve and regulatory tailwinds, Challenger’s lifetime annuity sales are likely to benefit, reducing capital intensity and maintaining an attractive valuation. The current valuation of Challenger shares stands at 13 times the estimated earnings for FY26, according to UBS.
Light & Wonder Inc: A Leader in Gaming Innovation
The second share highlighted by UBS is Light & Wonder Inc (ASX: LNW), a prominent global gaming company primarily focused on slot machines in the North American market. The company provides gaming machines for outright purchase and lease, alongside digital game content available on Apple and Android devices and via the internet.
UBS has also rated Light & Wonder as a “buy,” with a price target of $199, suggesting a potential rise of nearly 50% from its current valuation. The brokerage firm notes that industry conditions remain robust, with gaming operations installations on the rise and the Grover acquisition contributing as anticipated.
At the time of the UBS note, Light & Wonder was trading at a 44% price/earnings (P/E) ratio discount compared to Aristocrat Leisure Ltd (ASX: ALL).
Broader Market Context and Future Implications
These recommendations from UBS come amid a broader context of market volatility and evolving regulatory landscapes. The ASX 200 has seen fluctuations as investors react to global economic uncertainties and domestic fiscal policies. In this environment, identifying undervalued stocks with strong growth potential is crucial for investors seeking to optimize their portfolios.
Challenger Ltd’s focus on annuities positions it well to capitalize on Australia’s aging population and the increasing demand for retirement income products. Meanwhile, Light & Wonder’s innovative approach to gaming and strategic acquisitions place it in a favorable position to leverage growth in the digital gaming sector.
As these companies navigate the complexities of their respective industries, their performance will be closely watched by investors and analysts alike. The potential for regulatory changes and market dynamics will continue to shape their trajectories in the coming years.
Investors considering these shares should remain informed about ongoing developments and market conditions to make well-informed decisions. As always, consulting with financial advisors and conducting thorough research is recommended before making investment choices.
