Long Dated Growth Strategy For AMP

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AMP has briefed the market on its wealth management strategy and believes it can sustain growth in earnings over the next five years despite compressed margins.

-AMP plans to increase wealth management revenue by 2% per annum
-Doubling of the bank division profit targeted over the next five years
-AMP Bank target could be a stretch in current environment
 

By Eva Brocklehurst

AMP ((AMP)) has briefed the market on its plans to re-position its wealth management business around the advice it offers, and extract greater economic benefits from Self Managed Super Funds (SMSF).

The company believes it can sustain growth in wealth management earnings over the next five years despite a compression of margins. This involves taking stakes in adviser businesses and growing the SMSF business.

AMP intends to increase wealth management revenues by 2% per annum and highlighted its relatively solid 5% growth in revenue per annum over the last five years, despite a -2% headwind from margin compression.

Wealth Management

Morgans believes management has stepped up to the task of addressing revenue concerns for the wealth management business and, if AMP can execute on its plans, wealth management revenue growth will be restored to 5% through the cycle.

Morgans believes the long-term growth potential of the company's funds management business, Capital Investors, is under-rated. The business retains skills in real asset investments, and assets under management grew to $36bn in 2016. The broker points to the China Life Pension joint venture, in which the company has a 20% stake. China Life now the largest pension company in China.

Moreover, AMP China Life Asset Management, in which AMP has a 15% stake, is the fastest-growing fund manager in China with $22bn in funds under management. AMP is targeting $50m in earnings from China in five years and, while growth is long dated, Morgans believes it is potentially exponential.

The broker considers the stock oversold, maintaining an Add rating, and believes the market will become more comfortable when wealth protection earnings have been fully re-based and the wealth management performance improves after recent volatility.

UBS believes achieving $50m from China is plausible and there is clearly growth potential in some areas of the business. Nevertheless, the broker remains curious as to how material the impact at a group level will be, given the drag from the three businesses that are now effectively being run off. This includes mature business, New Zealand and wealth protection, which incorporate around 35% of 2017 estimated profit.

AMP Bank

One area where Morgans is less confident is the banking division. Management targets a doubling of the profit of the bank over the next five years. This plan relies on achieving above-market growth by leveraging the adviser network. Morgans notes only 25% of the company's advisers originate debt with AMP.

While acknowledging there is significant room to grow and the business will benefit from investment in scale, the target appears a stretch in the broker's opinion. This is particularly likely given a slowing housing market and the conservative risk settings of the AMP Bank.

UBS agrees the doubling of earnings in AMP Bank over five years appears unrealistic, given the macro environment. Moreover, the advice uplift is expected to be partly driven by a move into ownership of advice and taking equity stakes, which requires capital and logically results in a small drag on investment income elsewhere.

UBS believes the revenue uplift expected from SMSF appears even more ambitious relative to the $35m in 2016 revenue, requiring the business to double over the next three years. A big ask in the broker's opinion.

Citi suspects the company is seeking to dispel a view that it is ex growth. While understanding the motive, Citi considers the stock appropriately valued and highlights the execution risk. The broker retains a Neutral rating, despite acknowledging reasonable value and an attractive dividend yield.

Ord Minnett, on the other hand, is comfortable with the growth prospects. The broker suggests the share price does not allow for any of this upside and, if the expectations for wealth management and the bank are realised, forecasts around 16% upside to estimates for 2022 operating earnings.

Macquarie does not expect the policy of transforming the portfolio towards a higher growth, capital-light business will affect earnings in the short term. Therefore, the investment case is considered sufficiently compelling at the current price.

Aside from this, the performance of AMP Capital is increasingly less reliant on the group relationship and the broker believes this could support a restructure, if the advice strategy does not deliver to expectations.

The main concern for Credit Suisse is high investor expectations. Management is seen operating in a very difficult environment and there are risks in the near term, with the growth potential being more towards the medium term. The broker believes the current discount of around 15% to the ASX200 is justified, given the earnings risk.

There are three Buy ratings and four Hold on FNArena's database. The consensus target is $5.63, suggesting 10.8% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 5.8% and 6.0% respectively.

See also MySuper Churns For AMP, But Bank Strong on May 12 2017.
 

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