Treasure Chest | May 23 2018
Morgan Stanley tackles the outlook for AMP, suggesting it may be time to review purchasing the stock.
-Wealth management may be in the spotlight but is just 38% of AMP operating earnings
-Wealth business, normally, should trade at a premium to the market
-Morgan Stanley's call largely reflects incumbent assets, not growth
By Eva Brocklehurst
After being grilled by the Royal Commission, the outlook for AMP ((AMP)) has become swamped by conjecture regarding possible regulatory changes and punishments that may be meted out to the financial advice industry.
Where to from here? Morgan Stanley tackles the question and suggests the stock is offering deep value, as it is trading at levels not seen since 2002/03. Market fears are overdone and the broker suggests now is the time to build a position. As a result, the broker's rating is upgraded to Overweight from Equal-weight with a target of $4.50.
All the risks relating to a lack of board cohesion, unlocking value in the existing structure and the regulatory risks that undermine its reputation in financial advice have confronted the company in quick succession.
The broker also makes the point that wealth management may be capturing attention at present but this is just 38% of operating earnings. The portfolio beyond wealth management is diverse as it covers banking, the AMP Capital Investors division, mature or legacy products and NZ wealth, life insurance and funds management.
While re-shaping vertical integration may require tougher regulation, Morgan Stanley expects, in the long run, this will play to the strength of AMP.
Deeper industry analysis and consultation will probably support the existing structure, although the broker acknowledges that the Financial Planning Association has recommended that large licensees be legally required to operate advice and product manufacturing separately.
Ord Minnett, with an Accumulate rating, factors in a -15% discount to account for the risk that vertical integration is eliminated.
Other issues, such as grandfathered commissions and the potential for an exodus of financial planners from the company's platform, are not believed to be well understood and Morgan Stanley considers the market overly bearish in incorporating the risk. Any pressure on advice fees is negative for planners but does not affect AMP's earnings.
A Buyer of Last Resort (BoLR) structure and the terms of franchises make it difficult for planners to leave and so the broker points the best path forward is to work in partnership with AMP to grow the assets.
No Quick Fix
Morgan Stanley is not suggesting there will be a quick fix, just that fear and speculation around the company's business model has been well incorporated into the share price. Detailed consideration of the issues that were raised, in the context of what initiatives the company is taking to address the problems, should provide the path to resolution.
The broker acknowledges that bad news in the form of re-basing of earnings, restructure and remediation costs could emerge as a new CEO settles into the job. Again, the broker suggests this is captured in the numbers and any adverse reaction in the stock will present a further buying opportunity.
In the near term, the positive catalysts are likely to be the appointment of the new CEO, wealth flow details at the first half results in August and data suggesting planner numbers have proved resilient.
The share price is currently implying that the wealth management business is trading on a PE of around 4x FY19 estimates. The broker points out this wealth business normally, re-based and without the overhanging uncertainty, should trade at a premium to the market. This business has low capital intensity, high returns and market-linked revenue.
There are risks that must be acknowledged, such as a lengthy time to appoint a new CEO, delays to re-building, a crunch on advisers as planners seek to crystallise assets or leave, and a more substantial squeeze on fees via regulatory changes or consumer migration.
AMP, and to a lesser extent IOOF ((IFL)) stand out for Morgan Stanley as the only two major institutional players committed to investing to grow and evolve advice and financial planner capabilities. Major peers are now going down a different path.
While the franchise is damaged, Morgan Stanley suggests the market could be surprised by just how resilient the business is. The company is yet to have a CEO or a strategy to unlock value, but the broker's call in large part reflects the value of incumbent assets, not growth.
Along with Morgan Stanley, there are three other Buy ratings on FNArena's database, three Hold and one Sell (UBS). The consensus target is $4.37, suggesting 8.1% upside to the last share price.
UBS notes the company was very cautious about costs at its AGM, assuming that the cost of customer remediation may be higher, along with the related expenses from the ASIC reviews.
The broker also finds little evidence of growth in the rest of the business outside of wealth management. Morgan Stanley acknowledges strategies are normally framed as 3-5 year periods so agrees investors seeking both growth and value are likely to require patience.
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