Analyst Research
1 March 2020
Since we downgraded the stock to Sell on corporate governance issues, the share price has declined -19.4%. We pre-warned that poor market sentiment would affect the stock price but highlighted how we could not quantify how much bad press and a deteriorating reputation affects actual earnings.
COMPANY DATA
| Date of Report | ASX | Price | Price Target | Analyst Recommendation |
| 09/08/18 | AMP | A$3.48 | A$4.00 | BUY |
| Date of Report 09/08/18 | ASX AMP |
| Price A$3.48 | Price Target A$4.00 |
| Analyst Recommendation BUY | |
| Sector : Financials | 52-Week Range: A$3.29 – 5.47 |
| Industry: Life Insurance | Market Cap: A$9,666.7m |
Source: Bloomberg
INVESTMENT SUMMARY
We rate AMP as a BUY for the following reasons:
- Trading at a significant discount to our valuation and undemanding market multiples.
- Excluding provisioning for advice remediation, segment results have been resilient.
- Further cost initiatives which should result in a ~3% reduction in controllable costs ex-AMP Capital going forward.
- Positive trends for inflow (such as superannuation legislation).
- Strong performance in AMP bank (for instance, stronger/weaker net interest margins or cost to income ratio).
- AMP Capital will potentially see significant net flows from both domestic and international investors.
- AMP Bank continues to perform well despite management being conservative in expecting a poorer 2H18.
- Expected strong flows and performance in NZ.
We see the following key risks to our investment thesis:
- Corporate governance issues and revelations made at Banking Royal Commission. Further implications may impact market sentiment towards the stock. The reputational damage may impact earnings indirectly such as advisers seeking to exit (Decrease in financial planners and advisers in the network), outflows or greater compliance costs.
- AMP Wealth Protection continues to perform poorly with continuing higher claims experience.
- Costs reduction expectations are not achieved.
Figure 1: AMP Operating Earnings by Segment
Source: Company
ANALYST’S NOTE
Since we downgraded the stock to Sell on corporate governance issues, the share price has declined -19.4%. We pre-warned that poor market sentiment would affect the stock price but highlighted how we could not quantify how much bad press and a deteriorating reputation affects actual earnings.
Operationally, AMP’s segments were resilient – indeed, on the analyst call, management noted “underlying profit for the half was $495m and net profit attributable to shareholders was $115m, obviously, impacted by the provision that we took for advice remediation. So, in our view, a resilient first half performance particularly given the events of recent months around the Royal Commission”.
The key highlights to AMP’s 1H18 result include: (1) 1H18 underlying profit A$495 m (1H 17: A$533 m) and net profit of A$115 m (1H 17: A$445 m), reflects advice remediation provision pre-flagged by the Company on 27 July. (2) the Company is on track to achieve FY18 cost guidance. (3) AMP is holding $1.8bn in surplus capital above minimum regulatory requirements.
Considering the share price underperformance, and current trading multiples (11.4x FY19 PE-multiple and 6.9% yield), we upgrade to Buy. Operationally the business is performing well with core franchise largely intact. Recent share price decline now likely reflects markets initial concern of funds outflows and loss of planners (hence for our initial sell call).
In our view, current multiples reflect less downside risk and more upside risk as the Company slowly works through current issues and repairs its reputation.
- Australian wealth management performed well in a challenging environment. Operating earnings for the segment increased +5.7% in 1H18, driven by growth in other revenue from Advice and SMSF businesses and lower controllable costs, offset by margin compression. Net cash outflows of A$873 m in 1H18 reflect a period affected by the Royal Commission hearings.
- AMP Capital is seeing momentum as AMP invests in real estate capabilities and international expansion. Operating earnings increased to A$94m, up +2.2%, driven by growth in fee income partially offset higher investment in real asset capabilities (new hires) and international expansion.
- AMP Bank was a strong performer driven by loan growth above system and slight decrease to cost to income ratio but not expected to continue. Operating earnings was 20% higher to A$78 m in 1H18 (1H 17: A$65m) driven by an 8% jump in its residential lending book to A$19.7bn and improved deposit margins. CET1 of 10.3% was up from 8.8% in the 1H 17.
- Australian wealth protection result was weak. Operating earnings decreased to A$1m, driven by a deterioration in claims activity (especially in total and permanent disability, which is occurring industry-wide) and capitalised losses and other one-off experience of A$29m (mainly due to reserve strengthening on a large group plan, which terminated on 1 July 2018).
- Costs are in line with guidance. FY 18 controllable costs (ex AMP Capital) are expected to at least achieve FY 18 guidance. AMP followed through on the cost reduction for 2017 further reducing controllable costs in 1H18 by -4%, and if excluding AMP capital, controllable costs were down by ~10%.
- Dividend payout ratio to be at lower end of guidance, but as expected. AMP announced interim dividend is 10 cps, franked at 50%. This was pre-flagged to the market on 27 July. According to management, this is outside “AMP’s 70-90% guidance range, enabling AMP to retain capital and strategic flexibility over the coming period. AMP is targeting a total FY18 dividend payout within, but at the lower end of, its 70-90 per cent guidance range”.
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AMP 1H18 RESULTS SUMMARY
Figure 2: AMP Financial Summary 
Source: Company
- Australian wealth management performed well in a challenging environment. Operating earnings for the segment increased +5.7% in 1H18, driven by growth in other revenue from Advice and SMSF businesses and lower controllable costs, offset by margin compression. Net cash outflows of A$873 m in 1H18 reflect a period where (1) member contributions were generally more subdued in comparison to 1H 17 when cashflows were elevated by Corporate Super mandate wins and higher superannuation contributions ahead of changes to non-concessional caps on 1 July 2017; and (2) flows were affected by the Royal Commission hearings.
- AMP Capital is seeing momentum as AMP invests in real estate capabilities and international expansion. Operating earnings increased to A$94m, up 2.2%, driven by growth in fee income partially offset by increased costs related to investment in real asset capabilities (new hires) and international expansion. AMP Capital’s external net cashflows of A$1.6 bn were A$2.4 bn lower than in 1H 17. According to management, China Life AMP Asset Management (CLAMP), which AMP Capital holds a 15% stake, saw AUM grow at to RMB188.1 bn (A$38.4bn) as 12 new products were launched across diversified, equity and fixed income funds. Total AUM for China Life Pension Company (CLPC), the pensions JV where AMP owns a 19.99% stake, grew +22% to RMB 647.8bn (A$132.3bn). On the analyst call, management highlighted that CLPC was selected as a trustee manager for the occupational pension plans for Xinjiang province, Shandong province and the central government. This is a significant positive in our view as according to management “China’s occupational pensions roll-out will deliver a compulsory superannuation-like system for around 40 million public sector employees”.
- AMP Bank was a strong performer driven by loan growth above system and slight decrease to cost to income ratio but not expected to continue. Operating earnings was 20% higher to A$78 m in 1H18 (1H 17: A$65m) driven by an 8% jump in its residential lending book to A$19.7bn and improved deposit margins. Net interest margin (NIM) was 1.72% for 1H 18, 5 basis points higher than in 1H17. The Common Equity Tier 1 (CET1) at 10.3% was strengthened in 1H18, up from 8.8% at 1H 17. Whilst this segment result was positive, management highlighted on the analyst call, “the mortgage market has been and remains very competitive, and in that context, we expect loan growth to moderate in the second half. Net interest margin was slightly down on the equivalent half of last year at 1.72% and we expect it to continue trending lower as we respond to competition and respond to tightening funding costs”.
- Australian wealth protection result was weak. Operating earnings decreased to A$1m, driven by a deterioration in claims activity (especially in total and permanent disability, which is occurring industry-wide) and capitalised losses and other one-off experience of A$29m (mainly due to reserve strengthening on a large group plan, which terminated on 1 July 2018).
- New Zealand financial services. AMP’s NZ segment saw operating earnings of A$56m, -13.8% lower than 1H17 as a result of lower profit margins and reduced experience profits.
- Australian mature. As expected, operating earnings of A$70m was impacted by portfolio run-off offset by lower controllable costs.
Figure 3: AMP Financial Summary 
Source: Company
COMPANY DESCRIPTION
AMP Ltd (AMP) operates as an independent wealth management company with a banking segment. AMP operates (1) Australian Wealth Management (providing financial planning and advice services); (2) AMP Capital (manages investments across multiple asset classes such as equities, fixed income, property and infrastructure); (3) Wealth Protection (providing personal, disability and income protection insurance); (4) AMP Bank; (5) NZ financial services (is risk insurance business); and (6) Australian mature (relates to closed products such as whole of life, investment-linked and annuities in run-off).
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