Life in AMP yet despite royal commission revelations

There is deep value in the stock because the business can be turned around.

AMP acting CEO Mike Wilkins. Picture: James Croucher

AMP is interesting because it is so hated and under-owned that any news better than the market expects would spark a rebound. Three per cent of the equity is short-sold, which would add to any squeeze.

The stock trades on just 11 times 2019 consensus earnings per share, which compares with the All Ordinaries Index on
15 times and many stocks of all sizes trading on multiples in the high teens or more than 20 times in an elevated overall market.

AMP’s record share price was $15.86 back in August 1998, a month after the stock listed. The long history of disappointments since the mid-2000s is attributable to risk underpricing and excess claims in the life insurance business and a variety of other failings.

More recently, the market fears major brand damage from the scandals and a mass exodus of customers, planners and funds under management/advice.

Your author has followed and covered AMP for its entire listed life but has not recommended it since the turnaround of 2002-03.

A share price for AMP

Backing turnarounds of large ASX companies has an excellent record as an investing strategy — is AMP the next such opportunity? This hinges on whether the new CEO, yet to be announced, can divest the life book while steadily growing advice, funds management and bank earnings. That is how AMP has to drive value.

We would not expect to hear AMP’s turnaround strategy for some months after the new CEO starts. In the meantime we are left with the recent earnings downgrade, business “re-set” and interim result announced by acting CEO Mike Wilkins.

AMP has provided $290 million for advice remediation and declared an interim dividend at the low end of the 70-90 per cent payout ratio target range. AMP also cut fees for 700,000 MySuper customers, will invest an extra $35m per annum in risk management and compliance, and will restore priority to last year’s portfolio review, which aims to release capital from the life and mature books currently being managed for value, not growth.

Bulls think this is the worst AMP will throw at shareholders. I think the fee cuts are the only recurring negative in the downgrade but I lean towards further large costs taken below the line (one-off, non-recurring items) and another rebase of earnings above the line in the new CEO’s first result.

Before the new CEO starts, the central question is the extent of sustainable profitability and value in the existing business.

And here the interim result revealed mixed trends. Costs are being managed well. Net outflows could have been worse and seem to have stabilised after the revelations at the royal commission. Planners continue to join. The bank and wealth divisions grew earnings at 20 per cent and 6 per cent respectively.

The bad news was yet another wave of elevated claims and lapses in life insurance, cutting the present value of the book and reducing its value to acquirers. New Zealand stalled.

Elevated regulatory, legal, compliance and remediation costs will continue. Margin squeeze in wealth and net planner attrition continue with costs set to rise next year. Capital is tight, with the dividend cut. Capital benefits from selling the life and mature books could be offset by the costs of separating and divesting them.

There is, therefore, a great deal of work to be done to restore AMP to growth.

However, the business is not broken and predictions of a mass exodus of planners and customers are overblown. Instead we see in the interim result the outcomes of bad management and governance over many years.

Standing by for a new regime

New chair David Murray has said he intends to give the new CEO strong powers to reform and manage AMP without board committees forming separate relationships with other senior managers.

Above all, the new CEO needs to divest the life insurance business as Suncorp announced this week, and grow earnings by attracting Australians to the heritage brand.

As unlikely as this might sound after the revelations at the royal commission, we have no doubt the right management can achieve it. But we do not see ourselves owning the stock until the life insurance business is gone. This has been a disastrous sector for investors.

The current focus is to calm investor nerves, demonstrate resilience in the core businesses and respond to the royal commission’s findings.

AMP is doing this under the stewardship of Mike Wilkins. The opportunity to rebuild AMP post-royal commission will attract a field of quality CEO candidates and we expect the market will welcome chair David Murray’s choice of CEO. This is an upcoming positive catalyst for the stock.

An opportunity in the stock is forming because the implied three-times earnings multiple on the wealth business is too low and the market is probably expecting more downgrades and value loss than AMP will deliver. There is deep value in the stock because the business can be turned around. The central investment question is the bear case valuation where the downside is priced in, which is at $3.30 — it is trading at $3.41.

David Walker is ASX large-caps portfolio manager at Clime Asset Management (clime.com.au)