Ann: AMP Reports 1H 18, page-3

Shaws highlights on AMP: Keep in mind this analyst has been bearish on AMP before it was 'cool', has called it well. They have a PT of $2.80 and Bells just reduced theirs to $2.65.

AMP has the following problems:
1. It achieved net cash outflows in 2 consecutive quarters in its Australian Wealth Management (AWM) business for the first time in 25 quarters and financial planner numbers are in decline;

2. The only product which is achieving net cash flows is the one with the lowest revenue margin, which is North. AMP said that the revenue margin for North was 59 bps of assets under management (AUM) for both administration and multimanager investment revenue. This compares with the average revenue margin of 96 bps for the $130B in AUM in that division;

3. The controllable costs in AWM were 35 bps of AUM in 1H18 and the investment management expense was 25 bps, giving a total expense of 60 bps, which is greater than the revenue margin in its only growth product. It looks like AWM is heading towards the unfortunate position of being a business without a profit. Substantial cost reductions are needed as the profit is going to fall in a hurry;

4. There was very little profit in the wealth protection business in 1H18 and this is expected to be repeated in 2H18. With the profit eroding, the capital requirement is increasing. The tangible capital resources allocated to this business increased by $101M from 31/12/17 to 30/6/18 which was consistent with the deferred acquisition costs (DAC) increasing by $109M over the period. The lapse rate in this business has increased and claims experience has worsened. It’s using almost $1B in capital and returning next to nothing; and

5. Capital is tight. The dividend was cut and the DRP is operating.