AMP: Optimists Look Beneath The Surface

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Analysts remain torn between deep value at the share price in AMP and risk of further Royal Commission fallout.

-Investment flows into AMP’s wealth management arm slow markedly
-AMP limits damage by cutting bonuses, but full impact is yet to play out
-Stock is trading well below its historical premium to the market, suggesting long-term upside

By Nicki Bourlioufas

Wealth manager and insurer AMP ((AMP)) appears to have ridden the waves of the initial backlash from the Royal Commission into Misconduct in the Banking, Insurance and Financial Services Industry, but analysts suggest the reputational damage isn’t over. As well, there are risks lurking in the form of possible regulatory moves and the uncertainty of sailing the ship without a CEO (for now).

On August 8 AMP released its result for the six months ending June 30, the first half-year of its 2018 financial year. The company announced an underlying profit of $495m, down -7% on the first half of 2017, and underlying earnings per share (EPS) of 17.0c. It will pay an interim dividend of 10c a share, 50% franked.

AMP stock closed at $3.48 after the announcement, with analysts expressing some relief that the fallout from the Royal Commission had not been as damaging as anticipated. The company experienced $673m of outflows in the second quarter. The major positive in the result was AMP’s reduction in ‘controllable costs’, largely thanks to a cut in bonuses.

Credit Suisse reacted most positively to the result, cutting its target price slightly to $4.30 and rating the stock Outperform, arguing that AMP is not currently trading on a fundamentals basis. While AMP has historically commanded a premium of 8%, it is currently trading at a price/earnings discount to the market of about -40%, the bank’s analysts noted.

At the other end of the spectrum, UBS rated AMP a Sell, predicting the stock will fall to $3.30 over the next 12 months and commenting: “Business momentum appears to have slowed at a faster rate than we anticipated.” UBS noted weak flows into AMP Capital and Wealth Management, net margin pressure in Wealth Management, the loss of financial advisers, and cautious guidance from AMP Bank. All these factors “point to earnings pressure in the second half of 2018 and beyond”.

Optimists look beneath the surface

Morgan Stanley was relatively sanguine about AMP’s long-term prospects, naming a price target of $4.25 and rating the stock Overweight with an In-Line view for the sector. The analysts said: “Deep value remains. The franchise and earnings resilience seems unappreciated, with market fears of a mass exodus of planners and billions of outflows failing to materialise. There is a lot to be done to restore AMP to growth, but the business is far from broken.”

Though client redemptions have settled in the aftermath of the Royal Commission, outflows are likely continue to feature in the second half. Financial planners continued to join AMP, although given that greater numbers left the group there was a net outflow of -4.7%, the investment bank said.

Continuing one-off costs below the line included -$13m for the Royal Commission, -$19m for a portfolio review and -$14m in compliance project costs. On a more positive note, AMP Bank boosted earnings by 20%, and operating earnings in the wealth management division grew 6%.

Ord Minnett highlighted many of the remaining risks are factored in at the current share price, and maintained its Accumulate recommendation with a target price of $3.90 at June 2019. The major positive in the result, Ords said, was that net flows only showed marginal deterioration, suggesting reputational damage from the Royal Commission had been modest.

Pessimists focus on weaker investment flows

Morgans reduced its target price to $3.88 from $4.56 and demoted the stock to a Hold. The broker said the key positive in the result was the outcome for controllable costs, which were down -10% on the previous corresponding period due largely to reductions in bonuses. “In our view, lingering pressures in Wealth Management and Wealth Protection are still concerns.”

Citi set a target price of $3.50 and rated the stock Neutral, High Risk. So far, AMP’s businesses are proving reasonably resilient to the impact of the Royal Commission, the investment bank said. First-half wealth management flows were weak, as expected, but so far there has been no mass exodus.

Citi said it seems likely AMP will continue to cut controllable costs, partly by reducing bonuses, “but that will likely rebound at some point”. The broker argued that with a payout ratio of 70% to 90% of underlying earnings and significant one-off costs, “AMP is likely to find it hard to build much capital organically. While capital remains adequate, there appears little scope for things to go wrong”.

Macquarie pinned its target price at $3.48 and maintained its Neutral rating, noting that “well managed costs offset weaker revenue”. Wealth Protection had another difficult period and Australian Wealth Management cash flows were impacted by negativity from the Royal Commission in the typically strong second quarter. Macquarie said it remained cautious on the stock given the subdued underlying business performance and the lack of a permanent CEO.

Reputation and regulatory risks loom

Even the optimistic Credit Suisse conceded the outlook for AMP was disappointing and expectations about outflows over the next 12 months vary wildly. Regulatory risk also remains a factor that will be debated and take time to play out.

Ord Minnett suggested that in the near term, the greatest risk is the impact of the federal budget reforms on AMP’s Eligible Rollover Fund / Retirement Savings Account (ERF/RSA). “Structural change is the big unknown, but this will affect all players in the industry, not just AMP.”

Citi flagged the possibility of more regulator action, fines and management initiatives such as further repricing and industry changes, including further possible Royal Commission impacts.

Risk Cuts Both Ways

Summing it all up, consensus expectations for AMP have continued to fall since AMP reported FY17 financials in February, and stockbroking price targets have followed by heading south, dropping yet another notch post interim result update.

The share price, which was trading near $5.50 only a few months ago, is now trying to find a bottom around $3.40.

It was only in April 2015, circa 3.5 years ago today, the share price traded around $6.50, making total losses incurred for loyal shareholders, excluding dividends, a whopping -47%.

That's the sad story. Optimists are looking towards the gap that has opened up between share price and consensus price target. With the latter now at $3.85, that gap measures circa 13%, plus dividends.

How long investors have to wait before that gap will be filled remains the topic of public debate, as illustrated by the divergence in stockbroker recommendations for the shares.

Out of the eight stockbrokers monitored daily by FNArena, only three currently rate AMP positively (2x Buy, 1x Accumulate). Four others say Hold/Neutral and UBS sticks to a Sell.

Then, of course, there is always a chance the final downgrade hasn't happened just yet.

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