After dropping 67% in 5 years, can this company turn the ship around?
KEY POINTS:
AMP's underlying business is stabilising, and there's good progress on the cost out
The market's reaction to AMP's 1H 23 results was appropriate, given the disappointment from the delay to the capital return, and uncertainty surrounding the quantum of adviser litigation liability
AMP is a buy, as it is less complex, has better cost management, and has a clear pathway for potential earnings growth, says Elston's Andrew McKie
It's been well-documented that AMP (ASX: AMP) has had a difficult few years. The Royal Commission was a blow to the company (and a shock to the Australian public, for that matter), with revelations that the financial services player had been charging life insurance premiums and advice fees to more than 2000 deceased customers.
While AMP was hit with a $24 million fine earlier this year for the wrongdoing, the repercussions have been disastrous for the company's share price. In fact, over the past five years, AMP's share price has cascaded 67%.
AMP's own "me-too" moment also wouldn't have helped. Nor would the reported $100 million in damages it would have to cough up after losing a class action surrounding its financial adviser payout proposal this year.
And yet, Elston's Andrew McKie believes the financial services player is now a buy. He argues CEO Alexis George, who replaced Francesco De Ferrari in August 2021, has managed to rebuild trust in the 174-year-old brand and helped steer the ship toward better cost management and potential earnings growth.
In this wire, McKie digests AMP's latest 1H 23 results, shares why he would be buying the financial services giant today, and outlines why he believes the outlook for Aussie large caps still looks promising despite the challenging economic conditions ahead.
Note: This interview took place on Thursday 10 August 2023. Elston was invested in AMP before this result. It has a 2.5% allocation to the stock. This is overweight compared to the market index.
Underlying NPAT in line with 1H 22 at $112 million
FY23 interim dividend of 2.5 cents per share, 20% franked
$302 million of corporate debt paid down in July 2023
Underlying EPS of 3.8 cents over the past 6 months, an increase of 11.8% from 1H 22
Provision of $50 million for Financial Adviser Class Action
Cost review complete - targeting $120 million in cost reductions by the end of FY25 (this will require a $120-150 million investment spend)
Total AUM grew 3.5% to $134.5 billion
AUM-based revenues down 8.8% from 1H 22 to $374 million
EBIT up 2.1% from 1H 22 to $147 million
$1.31 billion in cash on the balance sheet, down 11.4%
1. In one sentence, what was the key takeaway from this result?
The underlying business is stabilising, and there's good progress on the cost out, but the market won't like the uncertainty with respect to the delay in the capital return.
2. What was the market’s reaction to this result? In your view, was it an overreaction, an under-reaction or appropriate?
I think it's appropriate. It's interesting that it was a negative reaction to start with and then it's recovered.
The initial negative reaction is understandable, given the disappointment from the delay to the capital return, and uncertainty surrounding the quantum of adviser litigation liability. Markets hate uncertainty.
It's like kryptonite for your share price. So that's understandable. But the turnaround and the recovery of AMP's share price today is appropriate as well given the stabilisation at the core of the business.
3. Were there any major surprises in this result that you think investors should be aware of?
I think the first one was the stabilisation in pricing for the platforms business and the Master Trust. The market should feel comforted that revenues are stabilising. AMP has invested heavily in fee reductions within the Platforms and the Master Trust divisions. And that's strategically extremely important because if you invest in price, you get better gross flows. It also means it's very hard for advisers to shift under best interest standards. It reduces outflows. So fee reductions can really drive net inflows.
And the second thing was the cost out guidance. If you project forward the cost out program and combine that with the stabilisation in revenues, there is a clear pathway to earnings growth in 2024 and 2025.
And then thirdly, it's a significant business in Australia. It has $135 billion under advice on platforms. It has a thousand advisers. It's still a very significant player in the advice landscape.
Trust in AMP is building. People have memories for only so long and then they move on. I think more in the industry, we talk about it all the time, but the actual mum and dads not so much. It's still a reasonably well-known brand. And I think it's all about execution and stabilisation of the core business, and that seems to be coming through in this result.
4. Would you buy, hold or sell AMP on the back of these results?
Rating: BUY
We would buy AMP today, firstly because it is less complex, and secondly due to the better cost management over the outlook period. Thirdly, there is now a clear pathway for potential earnings growth in the core business. Lastly, there will be some resolution on capital management in the short term. And they do have significant surplus capital, in the order of $900 million, that can be passed onto shareholders. So for those four reasons, we'd be a buy.
5. What’s your outlook on AMP and its sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?
We like the regulatory-enabled and mandated growth in superannuation. We like the fact that household wealth is increasing. The Australian tax and superannuation regimes are complex and therefore, people need advice. So the demand for advice is clear and we think that will continue long term.
But then the supply side of the thematic is positive also, post Royal Commission. We've seen a reduction in advisers, so the advice supply side is constrained. And the Quality of Advice Review will enable the simplification of advice businesses and a better client experience. So, with solid demand for advice, constrained supply and a better client experience, we think the sectors definitely worth investing in and AMP is a significant player.
(20min delay)
