AMP Reveals Growth and Loss

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– AMP update shows improved funds flows
– Contemporary Wealth remains a problem
– Brokers lean to positive ratings despite trimmed forecasts
 

By Eva Brocklehurst

Insurer and wealth manager AMP ((AMP)) leads the market in a range of products. The complexity of the company's product line-up and wide ranging business – it conducts superannuation management, banking and investment –  is reflected in the latest quarterly report on funds under management (FUM) and cash flows.

Some brokers see the improvement in cash flow as a reflection of growth in the business that's strong enough to mitigate the loss stemming from claims in the Contemporary Wealth Protection segment. Cash flows were the best in three years in a quarter that's historically soft, according to BA-Merrill Lynch. However, the loss at Contemporary Wealth of $37 million reflects the third consecutive quarter that AMP has posted such a loss, and this is a relatively large one.

Many brokers focused more on this volatile area and came down on the side of increased risk in the future. In the end, the report was not enough to make brokers change their recommendations. Some tweaked the price targets and most reduced earnings forecasts for the next couple of years. In  the middle of the pack Macquarie stuck with its Hold recommendation and $4.60 price target and noted, on balance, that AMP's synergies were on track and the organic growth outlook was conservative. In its opinion the stock should perform as equity markets rally, but others are preferred for this exposure.

The quarterly update drew commentary that circled around two key items. The net cash inflows of $605 million for the September quarter were welcomed and considered strong. BA-ML noted this surpassed the second quarter ($503m), usually the strongest quarter, and compared to the previous corresponding quarter's net outflow of $335m. The broker believes this is a confidence booster for the continued integration of the AXA acquisition and may suggest high net worth individuals are coming back to the market. UBS was disappointed with AMP's risk business outcome. It had anticipated low single digit earnings upgrades with the release but instead sees the negative claims experience in Contemporary Wealth putting a dampener on the scene. The broker believes that earnings quality and stability needs to improve to justify current valuations. It retains a price target of $4.25. Citi notes the improved cashflows but says this strong result was aided by some one-off items, with some lower margin flows too. So, in its view, the underlying trend is not quite as positive as first appears.

Goldman Sachs was expecting a significant improvement in net flows compared with the third quarter of 2011, because that quarter was unusually weak and markets have improved modestly since then. However, the June quarter is the strongest of the year, so the broker was expecting a drop-off in net flows in Q3. As it turned out, the net flows were not just better than Q311 but were even better than Q212. Goldman Sachs also notes risk insurance annual premium income grew by 3.1% over the quarter, a good outcome. However, on the flip side, Q3 is the quarter that includes all the benefit from CPI and age premium increases on risk policies held within superannuation. This would probably account for a lot of the growth, Goldman admits.

The second string to the broker analysis was the Contemporary Wealth experience loss. BA-ML, like Goldman, said it reflected changes to CPI and age pricing in the quarter and, in this instance, was large given the economic backdrop. AMP has the highest listed company exposure to the superannuation savings market in Australia, the broker notes and, despite super's attractive long-term growth fundamentals, medium-term risks to super fees have risen on the back of emerging political risks and new low cost unbundled products. BA-ML sees this issue affecting near-term sentiment and concludes investment markets are also problematic for AMP. The broker does ponder if this loss should be considered just a one-off or whether there's more risk brewing on this front. It decided to 'give AMP the benefit of the doubt' and lifted the price target to $5.00 from $4.75, reflecting a 2-3% lift to earnings expectations. Moreover, the broker believes AMP has had a good run up from price lows of $3.80 and ultimately should track the broader market.

Citi decided to lower earnings forecasts but lift the target price. Earnings forecasts are reduced by 3% for FY12, 2% for FY13 and 1% for FY14. The target price is now $4.75 (from $4.50) and a Hold is maintained. Citi also dwells on the fact that it is the the third year in a row AMP has incurred experience losses in the third quarter, and each year the losses have increased in size. AMP cites income protection claims and poor lapse experience across its individual risk and income protection books as the source of these losses. Last year there was modest improvement in Q4, something which could happen again according to Citi.

Credit Suisse falls into the cautious category and lowered the FY12 earnings estimate by 4% to reflect the losses, but outer year forecasts are largely
unchanged and it retains a $4.65 price target with a Hold rating. With flows remaining subdued, ongoing structural changes in the industry are driving down margins and increasing capital requirements. Credit Suisse notes the strong take-up of the North wrap platform by AMP’s aligned planner network, with net cashflows of $644m, and the ongoing strength in AMP Flexible Super, with assets under management up 15% on 30 June. As with the others, Credit Suisse finds Contemporary Wealth losses the key negative. Management attributes this to both higher levels of claims and deteriorating lapse rates which, the broker maintains, is usually reflective of a deteriorating economic environment and/or planner churn.

Deutsche echoes this concern, noting the figures for this segment are inherently volatile but the economic background suggests it's a trend that could persist. Deutsche is one of two brokers on the FNArena database which retains a Buy recommendation. It has made a sharper cut to its earnings forecasts, trimming them for FY13 by 4%. This broker looks inside the price/earnings premium to the market, sees it coupled with the strong 3-year earnings outlook and 6% yield, and decides the stock justifies retaining a Buy rating. Deutsche believes the loss in Contemporary Wealth is a short term item, as there is strong support for AMP's wealth business with Q3 net flows and FUM growth tracking well ahead. Moreover, Deutsche forecasts a 1% rise in unemployment by December 2013 (6.4%) which it believes could drive a 10-15% or around $40m rise in claims.

RBS trimmed the target price to $4.45 (from $4.50), keeping it at a 10% discount to valuation to account for the tough operating environment. The broker believes there is strong upside potential for AMP as markets turn around and was encouraged by the excellent progress on the AXA integration. The soft operating environment concerns RBS and this update highlights the earnings headwinds still facing the company. RBS retains a Hold rating. The broker is concerned about the large Contemporary Wealth loss for the quarter, noting it does highlight earnings risks. However, RBS believes this is a risk for the wider industry as well and downgraded earnings forecasts by 5% for FY12 and 2% in the outer years.

On the FNArena database there are six Hold and two Buy recommendations for AMP. The consensus price target is $4.57 and the range is from $4.04 to $5.00.

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