Australia | Oct 29 2018
This story features AMP LIMITED.
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The company is included in ASX100, ASX200, ASX300 and ALL-ORDS
A post Royal Commission restructure was meant to reset the bar for AMP, but assets have been dumped in what looks like a desperate fire sale. Is there a future?
-Disappointing price on asset sales
-Disappointing funds flow update
-Questions around capital management
-Priced in now, or not?
By Greg Peel
While the financial services Royal Commission exposed shocking practices across the industry, no entity managed to shock more than AMP ((AMP)), such that the company’s share price fall over past months has outpaced that of the banks.
From before the RC, and as an ongoing response during the proceedings, the banks moved to offload “non-banking” businesses within their structures, specifically wealth management and insurance. Initially it was a strategy that made sense on the basis the non-banking businesses used up a lot of capital to provide minimal or negative returns, and with a period of low growth in banking looming, divestment and simplification seemed prudent.
But when each day brought new horror stories from the RC, a lot of the issues were emanating from these businesses, on top of issues in standard banking, thus making simplification even more attractive. Besides, the banks were going to need all the capital buffer they could muster ahead of whatever was to transpire from the RC, and cash-in-the-hand divestments are an obvious way to bolster capital.
Whereas the banks were banks with wealth management and insurance businesses as well, AMP was a wealth manager and insurer with banking services as well. Australians are less inclined to shift banks than they are wealth managers. On the assumption the AMP “brand damage” could cause somewhat of an exodus, AMP’s share price has underperformed, or outperformed to the downside, since the RC began.
Time for AMP, too, to consider divestments. Brand damage was inevitable but a more simplified AMP would over time offer a better value proposition after a sizeable de-rating, and the sale of assets would unlock the individual value therein.
At least, that’s what the market assumed. Last week AMP announced the sale of its wealth protection and mature businesses within AMP Life to Resolution Life for $3.3bn. It also announced an intention to IPO its NZ Wealth business next year.
How Much??
Even analysts admit unravelling the complex details of the sales and drilling down to an implicit valuation has proven a very complicated process, thus for the benefit of those readers for whom the detail is not the major concern, here are some broker reactions:
“Appears to be a very cheap price” (Ord Minnett). “Sales multiples appear depressed” (Macquarie). “Disappointing” (Morgans). “Much larger discount than we assumed” (Credit Suisse). “Well below expectation” (Bell Potter).
To add insult to injury, analysts had always assumed an exodus from AMP wealth management would follow the RC as mortified investors turned elsewhere, it was just a matter of how much. With its sales announcement, management also provided a quarterly update on funds flows and they, too, came as a shock, being a lot worse than forecast.
And that’s before the stock market began tanking in October.
Outflows from AMP funds will likely continue in the December quarter and still it is unknown the extent to which AMP and other financial entities will be hit with RC-related fines, compensation costs, and costs required to restructure further if ensuing regulation changes so require.
These will be important outcomes in more ways than one. The banks have sold assets and subsequently bolstered their capital positions, providing a buffer against future outgoings. AMP was supposed to do the same, but given sales proceeds well below expectation, and the unknown of what outgoings might be, it may be that stricken shareholders will not see any return from that $3.3bn.
In Perspective
All of the above needs to be considered in relation to the fact AMP’s share price fell almost -25% on Thursday alone, and is now down some -56% from its 2018 peak. The question, thus, as always in such instances, is whether the bad news, including the new bad news, is already priced in.
Here broker views diverge.
Outside of the FNArena broker database, Bell Potter suggests while last week’s news on funds outflows was not good, the bulk of the fall was due to asset sales proceeds well below expectation. “Why sell at such a poor price?” the analysts ask. “Is the board worried about further client refunds and needs the capital?”
There is little room left for a share buyback before proceeds are received, Bell Potter suggests. Notwithstanding future refunds/restructuring and any re-basing initiatives from the new CEO. The broker retains a Sell recommendation and cuts its target to $1.91 from $2.65.
Shaw & Partners also retains Sell, on a new target of $2.30.
Notably, there are no Sell ratings among the eight brokers in the FNArena database. Only one broker downgraded its rating following Thursday’s announcements.
Credit Suisse apologised to its clients. Since the broker upgraded its rating on AMP to Outperform a year ago, the stock has fallen a net -45%. “We appreciate that closing out such a loss-making call is neither logical nor helpful to investors,” admitted the analysts, “however based on a review of this updated information we are no longer confident that potential value will be realised for some time to come.
Not only did the asset sales result in a much larger discount than Credit Suisse thought possible, the analysts are not confident investors are going to see the proceeds from the sales for a number of years. Indeed, “if at all”.
But Credit Suisse was the only FNArena broker to downgrade.
Macquarie, Morgans and Deutsche Bank all stuck to Hold (or equivalent) ratings.
Macquarie suggests the depressed multiple implicit in asset sales combined with the earnings impact on remaining businesses have failed to unlock the potential value of the wealth management division. Echoing uncertainty around RC-fallout and the new CEO’s intentions, the broker sees “limited scope for the stock to Outperform”.
Morgans believes AMP is cheap at this price. But it, too, can’t get past future RC and new CEO risks. The broker needs greater clarity before shifting from Hold.
It is not clear to Ord Minnett as to why management chose to proceed with the sale at the price, particularly given the ongoing risks for the remaining wealth management business. That said, despite the disappointment the broker believes the remaining businesses do have growth prospects and that AMP appears now to be at “a very cheap price”.
To that end Ords is sticking with an Accumulate rating which, on the broker’s five-tier scale, sits between Hold and Buy.
Any Good News?
Credit Suisse suggest shareholders may never see any proceeds from the sale. Not all brokers share that view, although there is general recognition of a lack of clarity coming from management at the Thursday announcement.
Ord Minnett estimates AMP will have $2.2bn in surplus capital after the restructure.
UBS calculates a $1bn buyback is possible in the second half of FY19. UBS remains cautious, but believes valuation is beginning to emerge post sell-off. The broker has upgraded to Neutral from Sell.
Citi is not factoring in any buybacks at this stage, but believes an ultimate capital release should be “significant” – at least $1bn but possibly more. The broker acknowledges the ongoing risks for the remaining wealth management business but believes it’s worth more than the market is implying, following a sell-off that “seems severe”.
Citi has upgraded to Buy from Neutral, but with a High Risk qualification. “High Risk” is usually reserved for small cap speculative stocks.
And lastly there’s Morgan Stanley, who prior to last week maintained an Overweight rating on AMP on the basis of “deep value” at the price. The broker has not changed its tune, after a further -25% fall, and kept its rating.
While agreeing the asset sale process was costly and complex, Morgan Stanley believes the sell-off overlooks the potential from capital initiatives and the cost-out opportunity. The deal creates a simplified AMP for the incoming CEO to rebuild, and exiting capital intensive assets leaves a relatively capital-light, higher return on equity growth business focused on wealth management, asset management and retail banking.
“The stock looks oversold and attractive,” the broker suggests.
Morgan Stanley is not the only broker to note a more “simplified” AMP will emerge from the dust. All brokers have acknowledged the impact on earnings for the remaining business, leading to significant forecast cuts. This is manifested in an average database target price of $2.86, down from $3.79 prior (-24% — about what the share price fell on the day).
The net result of upgrades and downgrades leaves five Buy or equivalent ratings and five Holds.
All brokers remain wary of ongoing RC fallout. Most remain wary of a “reset” in expectations by the new CEO, although Morgan Stanley sees this as a potential catalyst.
There is disagreement on the extent of capital return, if any, that may eventually emanate, but agreement that this would be net of any fines, compensation and other costs that might result from the final RC recommendations, which are unknown.
There is general agreement that at the new share price, the stock is either cheap, or appears to be cheap. The question is as to whether or not it should be. For AMP shareholders, or those contemplating becoming AMP shareholders, it’s a matter of risk, and how much risk one can countenance.
A quote from Clint Eastwood might be appropriate here.
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