We never agreed with the thesis investors should buy AMP ahead of the May AGM, when the outcomes of the portfolio review of existing businesses are due to be announced. Some investors expected accretive divestments of the wealth protection (life insurance), New Zealand and mature books would be announced and trigger a rally towards $6.
We also disagreed with the view there was substantial hidden value embedded in AMP and waiting to be liberated by divestments. Instead, we harboured longstanding concerns about the advice business to be retained in the review, particularly regarding the ongoing loss of financial planners and a structural decline in revenue margins – and last year’s surprise suspension of the buyback, which we thought required more explanation. Having followed AMP for all of its listed life, we questioned whether divesting non-core businesses could address problems in a core business.
With the stock now back to mid-2003 levels around $4.30, we are more interested in AMP than before but think it’s too early to buy just yet. The revelations at the Royal Commission, the premature departure of the CEO and the evident need for board renewal add to AMP’s existing problems and precede a lengthy period of strategic uncertainty when the market will be unlikely to rerate the stock. A $4 share price is probable.
Well before the Royal Commission, investors had to consider AMP’s dwindling numbers of advisers, the structural decline in wealth management margins, generally weak product sales and AMP’s buyer-of-last-resort obligation to some of its financial planners. The Future of Financial Advice reforms of 2012 challenged the model of using commission-driven financial planners as sales channels for superannuation, managed funds, platforms and banking products. Commissions were phased out and the new requirement was for planners to advise in their clients’ best interests. Since then, many planners aligned with large dealer groups like AMP have drifted away, perhaps disillusioned with their diminished earnings potential or close to retirement anyway.
The irony is the major banks whose behaviour spurred the government to call the Royal Commission could end up in better shape than AMP, an indirect victim of the Commission. Most of the majors are disposing of their financial planners, advisers, wealth management businesses, fund managers and life insurance companies. The scandals which caused the worst losses to retail customers were in these areas, not banking. We think the major banks will hold their dividends this year and most will resume dividend growth next year, reflecting their strong capital positions and diminished need for new capital generation given slow lending growth.
There are more questions about AMP’s dividend growth given last year’s suspension of the buyback and the effects on planner morale of the Royal Commission’s findings. Under its Buyer of Last Resort facility, AMP might have to accelerate purchases of financial planning books of business if more planners leave the group in response to perceived brand damage and loss of potential business. AMP could be acquiring businesses with weakening product sales, which would accelerate margin decline.
AMP now needs an external new CEO and an external new chair to replace the organisation’s current business model and governance culture. It is rare for a major company to need a new external CEO and chair at the same time. If it takes six to nine months to appoint a CEO it could be two years before the new strategy is delivering full value. For some of this period the market would discount the stock for strategic uncertainty.
The search for the new CEO should be global to maximise the field of candidates with records of restoring corporate reputations after scandals. Australians are remarkably loyal to heritage brands but this stands to be tested in the case of AMP even if there is not a class action. The new management and directors need to bring expertise at restoring tainted brands and leveraging them fully, which is not something AMP has achieved since listing.
Regulatory, legal and compliance costs are set to surge for AMP as they have at the major banks. Surely an ASIC investigation awaits. Potential buyers of the life insurance, New Zealand and mature businesses might step back if they sense a wounded AMP would accept lower prices. AMP shares have entered a period when the market will question the intrinsic value of the advice business and the trade value of non-core businesses to be divested.
There are also implications for valuations of the core business AMP Capital, where 45 per cent of FY17 base fees accrued from internal assets under management (AUM) in net outflow. AMP Capital is a business we like for its offshore growth in Japan and China, and its diversified product suite. Management and directors have done well to grow AUM over many years to some $190 billion at the end of 2017. Separately listed, AMP Capital would be another funds management play of interest like Janus Henderson, Perpetual and BT. There could yet be an opportunity to buy shares cheaply in AMP Capital if the other business units including advice and the bank are divested.
Originally published in The Australian, Tuesday 24th April 2018.