AMP | OBSERVATIONS

AMP – Investor Day November 2021 Observations

Here are a few of my observations, there is a lot of very granular detail to get through in their presentation, so this is not exhaustive.

Firstly, the company should be congratulated for at long last being transparent with the business in their reporting. It doesn’t mean that all that was disclosed was good to see, but I’d much rather the devil one knows. And finally, we can attribute numbers to the devil in their details.

This may be subtle, but it’s a massive shift for AMP. As it pegs accountability markets within the business. Individual units can no longer hope to shy away from accountability as part of the mothership or legacy issues.

Secondly, it shows how truly useless and clueless FDF was as CEO. At the time I thought he was trying hard and had a plan. So best take all my opinions with a massive grain of salt, as I could not have been more incorrect in having supported FDF during his reign. This granular reporting now shows that he was completely inept and just another spiv in a slick suit. He clearly had no idea nor any grasp of the complexities he would have to address. The previous disclosures before this look like a sandbagging. And his appointments were shockers, Boe and Wade. So he failed at the most basic elements of resource allocation, which is the where the rubber hits the road for any CEO.

Now let’s get stuck into the detail:

Bad bits

1. Advice

What a shocker of a business. To think that AMP has funded these losses predicated on the old rent-seeking (cross-subsidisation) approach to wealth management makes one scratch there head.

The only positive here is that if AMP can get this back to break-even, well that’s approx. $170m of NPAT it doesn’t need to find from revenue growth. So let’s say the business currently trades on 10x $300m of group underlying earnings. If they can just get advice to break-even you are looking at $470m in underlying NPAT. This is quite astonishing.

To give them some credit, getting rid of employed advice, via the sale to PSK seems sensible. Thankfully FDF is not around or he’d spanking more money on this channel, shows clearly what a joke he was.

2. Master Trust

I would have thought this was more profitable. But one can clearly see the delta between price reductions (decent long-term move) and profit reduction vs 2020 and 2019.

So less profit than I would like, but I’d argue more long-term value and ability to compete against KKR at Colonial.

3. Separation Costs

This is what grates me the most. Seems AMP only has cost buckets in the $50-$100m range for every sale/transaction. WTF. $200m in demerger costs.

4. PMCo

Put simply, the way the PMCc has been structured, it appears that the staff are getting the best deal. This is AMP after all.

It is somewhat derisory to shareholders to suggest that they can only keep 80% of this asset, less a further 12% which is effectively being gifted to staff.

Slide 65: The Comparable with Apollo, Brookfield, Blackstone and KKR was asinine.

The context is not even close to relevant.

PMCo staff are welcome to join Apollo, Brookfield, Blackstone and KRR, however they will not see anything like those levels of employee ownership (for their benefit) were they to join now. For those companies are all founder owned/operated businesses that subsequently went public. Of course founders/employees own a decent chunk of the business.

The comparison with these US companies is not even close to being relevant in the context of AMP PMCo which was built from within a public company. This just smacks of greed. Regrettably it’s probably a cost of doing business at the moment, however I think the 12% target is too high. I think Macquarie demonstrate that at 5% staff ownership you can have a pretty slick business, with good remuneration for staff based on results.

Now for the good bits (don’t hold your breath)

1. Accountability and results

This is the first time that AMP has been prepared to give owners a proper look under the hood. This is a subtle, but I would argue, super important shift.

As transparency, drives accountability, which drives results.

You’ve got to give Alexis credit here, as she’s clearly put pegs in the ground for performance and accountability. This must have been uncomfortable for some parts of the business, but I’m confident that it will serve as the catalyst for longer term results.

2. PMCo

The economics in 2021 appear modest. But these are clearly trough earnings as they transition from the open-ended fund model toward the close ended fund model (better fee prospects but back-ended fee recognition).

I’d expect in a few years to see this business back toward the (albeit lumpy) $150m p/a NPAT. I’d say results will swing about $50-$75m a year depending on fund maturities.

GIF has clearly been hit hard with Airport valuations, driving lower base fees but that’s understandable.

Whilst I whinge about the demerger costs and cost out program, this cost reduction will end up falling straight to the bottom line (less the non-cash cost of the staff allocation) so for this $300m de-merger cost, it’s quite possible that there is $60m in additional NPAT coming through effectively a 20% ROC. Not bad.

3. Bank

All this makes good sense. Use the structural cost base advantage, to target the higher cost operators who won’t want to sweat their Net Interest Margin. Look at how WBC got barrelled when they disclosed a reduction in NIM, oh and CBA copped the same, the big banks will have a hard time to keeping up with AMP in this game. So growing in a sensible risk-adjusted manner when your cost base is half your competitors makes perfect sense. As we see with MQG, there is no reason AMP cannot grow at 2-3x system.

Problem for some investors who want a dividend, is that this will consume some capital. Personally, I’m indifferent to the dividend, I want the earnings engine underneath it all.

4. China Life (CLPC & CLAMP)
Terrific asset. Difficult to monetise near-term. But an excellent asset to hold long-term. This asset value will gradually swallow AMP’s market cap if taking a 10 year view. Great to see some visibility on this.

5. Platform

Platform performing way better than HUB, not far off Netwealth. This is promising. It’s encouraging to see Scott run this as a separate division as it at least paves the way for access to EFA flows vs reliance on the old AMP network.

6. Retirement

I expect the jaws of this product suite to open up in coming years. Challenger will be mopped by Athene. A big US PE shop won’t be particularly friendly toward poor old Australian retirees. I suspect Scott is playing this chess game a few moves ahead. Alexis quoted Scott as having said that we now have the best in the business driving this. I think this has promise and it's an adjacency for the Platform (North) not the advice.

7. NZM

Will be far better run with Alexis’ attention to detail vs FDF.

Decent asset, decent contributor.

Where to from here?

No idea re price near-term. I think most of the analysts are just an echo chamber of share price and a bit of hysteria. The UBS analyst is a turkey, underlying earnings are in the order of $300m, $450m odd of surplus, capacity for funding via hybrids, stacks of capital in AMP Capital business, so the ability to fund this de-merger and cost out initiatives is not a problem in my mind.

The write downs pre-investor day were not pleasant. Why? I think everyone thought FDF had done a kitchen sink job on provisions and James the CFO was a part of it all. So the question must be asked, how did they miss another $425m of impairments?

So let’s look at the implications:

1. Deferred tax assets $100m – Fair enough, largely a timing assumption on future tax assessments

2. Write-down of intangibles $135m – This is what I like, as it effectively saves $10-$15m odd of amortisation charges each year, which effectively shows up as a profit in subsequent years (ie a cost that is no longer there). So near-term write-off, long-term NPAT gain.

3. Onerous Lease Contracts $110m – signed when AMP was a big business, I suspect plenty of office floors no longer needed.

4. Other impairments & adjustments $80m – Probably a fair reflection of market value

As ever, I worry about a takeover at these low prices. But probably unlikely.