Not Over Yet For AMP

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AMP has “reset” its expectations, implying a profit warning, but brokers fear there is likely still more to come as uncertainties remain.

-Profit downgrade, costs taken, fees reduced
-Core businesses performing okay
-Capital comfortable
-Too many uncertainties

By Greg Peel

“First press of the reset button,” says Macquarie. “Reset seems only partial, plenty of uncertainty still,” says Citi. “Addressing customers first,” notes Credit Suisse.

“It’s not broken,” says Morgan Stanley.

Brokers have responded to last week’s guidance update from embattled AMP ((AMP)), which management described as an “action to reset the business”. Profit guidance for the first half FY18 has been lowered to $490-500m, below consensus forecasts, and is thus a profit downgrade by any other name.

The downgrade is nevertheless attributed by management to “negligible operating earnings” from the Wealth Protection business. This provides a new issue for investors to focus on, suggests UBS, given AMP’s intention to sell the business.

The reset actions include $565m of upfront costs over the next three years, and fee-repricing for MySuper, following BT Financial’s ((WBC)) first-cab-off-the-rank move last week. Additional margin squeeze is also expected in other products.

In order to buffer its capital position, AMP will reduce its dividend to the lower end of 70-90% payout ratio guidance.

The profit downgrade was greater than brokers had assumed and below the line costs taken seem quite excessive. However, not all the news is bad.

The Good News

There was not much of an update on AMP’s other businesses, but if the profit downgrade is all about Wealth Protection, this implies the core businesses are still doing okay. Thanks to strength in markets, assets under management (AUM) have actually increased.

There was fear AMP would have to go as far as raise new capital to cover the ultimate fallout costs from the Royal Commission (RC) but for now at least, the board feels comfortable enough with $1.8bn in excess capital despite little hope of organic capital growth in the near term. The dividend has been reduced but the DRP will not be neutralised.

Morgan Stanley notes the rest of AMP’s portfolio, outside of Wealth Protection, appears to be performing slightly better than the market feared. A consensus view that some $4bn per year in funds outflows over coming years as the likely fallout will likely prove too bearish, the broker suggests.

Notably, no large accounts have gone to tender and there has been no significant “buyer of the last resort” requests from advisors. (Contracts have AMP obliged to buy out advisors who choose to retire. It was assumed many would take this opportunity to bail.) The implication is apparent “franchise resilience”, Morgan Stanley suggests.

Citi agrees it was “perhaps encouraging” that the core growth businesses are still growing and AMP has confirmed no significant BoLR liability so far, and nor does it appear advisor departures have led to a significant drop in assets under management.

But there has to be a “but”.

The Bad News

“Today’s update appears more like an entrée to us,” UBS warns. And UBS is not alone.

The broker believes the “main course” will need to address a wide range of other significant issues, including the new CEO’s strategy, RC responses, grandfathering and budget proposals.

Macquarie sees the “reset” as a step in the right direction, but the broker continues to see risks of further rebasing, additional one-off costs and a reduced excess capital position.

Citi notes the reset deals with some risks, but there seem to be several others that were not addressed. It is still too early to quantify the impact of the salient factors, the broker warns, including RC-related brand damage.

Credit Suisse concurs that there remains uncertainty around how much brand damage has been done, and how this translates into Assets under Management (AUM) loss. Further, it is unclear what additional fee reductions may be required. The broker forecasts $15bn of AUM outflows over the next 18 months but suggests “market-leading” fees may not need to as dramatic an adjustment.

“However, only time will prove this right or wrong.”

Credit Suisse is nevertheless prepared to give AMP some benefit of the doubt. Over time the broker expects overly pessimistic concerns to be addressed and the share price to recover. The business can stabilise and return to growth, so CS retains an Outperform rating, but warns this may take 12-18 months.

Morgan Stanley maintains its role as flag-waver for the stock. With an implied PE of 2.5x for the wealth division, the market is pricing in material downgrades and material loss, the broker suggests. AMP’s update likely indicates franchise resilience as the clean-up continues. Morgan Stanley retains Buy.

For others, too much uncertainty lingers. This keeps Macquarie and Citi on Neutral, while UBS is sticking to Sell, seeing further downside risk for the next 2-3 years.

The three remaining brokers in the FNArena database are yet to respond, leaving four Buy or equivalent ratings, for now, two Hold and a Sell. The consensus target price has fallen to $4.00 from $4.20 pre-update, on a range from $3.30 (UBS) to $4.56 (Morgans, yet to update).

The consensus FY18 dividend yield at current pricing is 7.0%.

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