come on rampers...give us a laugh, page-19

re: scott...amp. CitiWarrants: AMP - Room for some consolidation?
18/02/05
Stock Focus – AMP Limited

Room for some consolidation, but transformation still on track

AMP’s headline FY04 profit result of A$934m was A$94m ahead of Smith Barney Citigroup forecasts due to one-offs and higher investment earnings. However, focusing on the more important “underlying contribution”, the result was in -line with an actual of A$671m compared to their A$673m estimate.

The even more relevant valuation metrics showed strong growth over 2H04. Using a 9.4% discount rate (4% discount margin) AFS’s embedded value pre -transfers rose 15% over the half to A$6.9bn while its one year’s new business value was up 8% over the half to A$261m.

AMP’s FY05E capital return of 40cps is within Smith Barney Citigroup’s estimated 39cps to 51cps range and will also see the repayment of AMP’s remaining income securities. AMP also supported their view that this capital return will not be a one-off event with another one likely in FY06E.

Capital returns are hard to factor into forecasts. The immediate impact reduces investment earnings and Smith Barney Citigroup include this in our EPS changes, FY05E: +1%, FY06E: -2%. They show FY07E estimates for the first time.

The six-month roll-forward of Smith Barney Citigroup’s cross-cycle valuation moves it from A$6.08ps to A$6.69ps while they lower their target price 5cps to A$8.45ps.

AMP does not look cheap and the stock may consolidate around this level, but the longer term story remains attractive, including potential for higher RoEs, more capital returns, further strong growth in value metrics and, in time, an increased dividend payout ratio and higher franking level.