Deep value play, page-102

Market overreacts to AMP's historic life sale
When AMP lost almost a quarter of its market capitalisation on Thursday, or $2.4 billion in value, it said a lot about the heavy price for extracting the company from the highly regulated and capital intensive life insurance sector.
It was an historic day for AMP because it marked the end of its 169 year association with the life insurance market. It started as a mutual selling whole of life policies, which were, in effect, the first collective savings vehicles in Australia.
The life company played a prominent role in supplying the country with patient capital, particularly in the rural sector. It founded the Stanbroke Pastoral Company in 1964 and it became one of the largest land owners in Australia.
AMP's statutory life funds were the bedrock of the country's capital markets until the 1980s when the government abandoned the 30:20 rule which forced fund managers to hold 30 per cent of funds in securities of public authorities including 20 per cent in government bonds.

Deregulation and the emergence of fleet footed fund managers such as Bankers Trust (now BT Financial Group) disrupted the flow of institutional and retail money. AMP struggled to cope with these changes.

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When it lost its mutual status in 1998 AMP entered into a period of tumultuous upheaval. It has had more than five chief executives since then and three boardroom clean outs.
This week's restructure aims to shift AMP's focus away from its life business to its higher growth businesses in financial advice, banking and funds management. It is going to raise a total of $4 billion including the IPO of its New Zealand wealth management business.
The market clearly overreacted to the news that AMP was selling its life insurance business to Clive Cowdery's Resolution Group. Cowdrey specialises in buying life insurance books and has created four separate vehicles over the past 20 years to manage books of life policies.
He has the advantage of being able to diversify his risks across different geographies while earning mid to high single digit returns.

Chanticleer understands he would like to buy more life books in Australia.
Reasons for the rout

A number of factors contributed to the 24.5 per cent plunge in the AMP share price to $2.50. Firstly, the second half dividend was slashed because all discontinued businesses in Australia and New Zealand will be excluded from earnings.
It looks as though the final dividend will be 10c a share, compared to 14.5c a share in the previous corresponding period. That means 2018 will most likely see the full year dividend cut from 29c a share to 20c a share, a cut that is worse than Telstra's cut from 31c a share to 22c a share in one year.

This exclusion is understandable given that all of the liabilities in AMP Life were transferred to Resolution from June 30 this year. The transaction will not complete until the second half of next year but AMP's shareholders are already free of the problems caused by the surge in claims in trauma, income protection and disability.
The AMP share price plunge ought to be put in some perspective. The stock had risen about 10 per cent ahead of Thursday's announcement. If you look over the past three weeks the performance of AMP is in the middle of the performance of Magellan Financial Group, which is slightly better, and Perpetual, which is slightly worse.
Another factor which worked against acting chief executive Mike Wilkins as he attempted to sell the simplification story, was the complexity of the deal. In order to get the deal done, AMP had to invest in the vehicle created by Resolution to hold the AMP assets.
Also, it had to recapitalise the life business after taking out the 19 per cent shareholding in a joint venture in China with China Life.

But at the end of the day AMP was able to pay down $800 million in debt and it will have about $2 billion in cash and liquid assets.
Looking ahead

If you look dispassionately at AMP it could earn about 25c a share in a year's time. It will then be sitting on about 68c a share in cash and tradeable securities. The spare capital could be used to invest in the business or be returned to shareholders through capital management.
AMP shares are now being traded at about eight to nine times forward earnings which compares with a price earnings multiple for rival wealth managers of about 13 times. AMP is targeting a return on equity of about 15 per cent under new CEO Francesco De Ferrari who starts work in five week's time.

One of the worrying aspects of Thursday's announcement was the information on cashflows for the September quarter. AMP has clearly lost the confidence of independent financial advisers judging from the 31 per cent plunge in cashflows into the company from external platforms.
Its own wealth management platform saw its net cashflows go backwards from negative $780 million in the year to September 2017 to negative $2.35 billion in the year to September 2018.
Wilkins said AMP's cashflows had clearly been badly affected by the Hayne royal commission. He does not expect flows to resume their normal behaviour until after the final Hayne report is published in February next year
AMP has had so many false dawns in its 20 year history as a publicly listed company that any measure it announces will inevitably be treated with scepticism. But it would seem the market is unwilling to believe there is a bright future until the company has the runs on the board.