Treasure Chest: AMP

This story features AMP LIMITED. For more info SHARE ANALYSIS: AMP

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s idea is AMP.

Whose Idea Is It?

Jefferies.

The subject:

AMP ((AMP)).

AMP shares reportedly joined the Australian Stock Exchange in 1998 at around $18.70 a piece but shareholders soon enjoyed a share price trading above $20. Early this year they traded at 85c, and closed yesterday at $1.26. That’s a 48% rally from the low, but hardly inspiring in the wider context.

Stockbroker Jefferies last week initiated coverage of the stock with a Buy rating, foreseeing a “less dramatic AMP”. The broker has set a $1.43 price target.

Jefferies notes the wealth manager has had a chequered history since listing in 1998, resulting in reputational damage (No more so than the Royal Commission of 2018.) This is evidenced by adjustments to its business model that have resulted in retained losses of -$3.3bn on the balance sheet.

But following a series of divestments, AMP has exited businesses responsible for prior earnings shocks, or others that present the potential for increased earnings volatility through investment market exposure. Combined with changes to its wealth management business, Jefferies believes the company will be less exposed to significant negative attention in the future.

AMP’s wealth brands (Australia & New Zealand) are benefiting from cost initiatives, the broker notes. The decrease in adviser numbers post Royal Commission has already improved revenue per adviser and should also allow the company to recalibrate its cost base.

In the meantime, the “North” wrap platform continues to attract inflows and remains competitive, evidenced by the increase in net cash inflows from independent financial advisor channels.

There have been reservations about AMP’s banking business, but Jefferies suggests digital-only offering and narrow product set should see good returns.

Cost-outs are one thing, but the broker is also keen on AMP’s planned capital management initiatives equivalent to 29% of the company's market cap (subject to shareholder approval).

Jefferies forecasts assume $850m in on-market share buybacks completed by FY24. Combined with decreases in controllable costs, the broker’s FY24 earnings forecast implies a 21.7% compound annual growth rate over FY22-24.

More info:

Last week AMP provided a September quarter update. The assessment from FNArena database brokers covering the stock was that the banking business outperformed expectations, but weak growth trends persisted in other divisions.

Ord Minnett (Hold) noted Australian Wealth Management funds under management dipped -3% due weak markets, but net outflows more than halved year on year. Although the broker expects the loss of the Australia Post contract could affect Master Trust flows.

Ord Minnett has a $1.20 target.

Citi and Credit Suisse are both advising in a takeover of Collimate Capital which is an AMP subsidiary, and are currently restricted from providing a recommendation.

Updating for AMP’s August earnings result release, Morgan Stanley (Equal-weight) saw it as critical that AMP re-invests to stay competitive, with AMP Capital to be mostly divested. Yet $1.1bn is expected to be distributed by capital return, special dividend, or on-market buybacks, with no dividend declared in August.

UBS questioned margin contraction in the banking business at the time, although the September quarter clearly saw improvement. UBS has not altered its Sell rating, having declared AMP as "expensive" compared to peers.

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