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Two of the investment “truisms” are “every dog stock has its day” and “don’t catch a falling knife”. Investors are now looking at Australia’s once great and largest financial institution, AMP, and asking which of these apply. Is it a buy, or just leave it alone?
There is no doubt that AMP has been a “dog” of a stock. Right from its very first day as a listed company in 1998 following demutualisation – probably the most chaotic trading day in the ASX’s history – when AMP shares opened at an astonishing $36.00 (about $20.00 higher than anyone had expected), traded up to a high of $45.00, before closing at $23.00, it has been in this category. Failed investments in the UK (the purchase of Henderson and National Provident Insurance), the attempted takeover of GIO and then the merger with its once fierce rival, AXA Insurance (formerly National Mutual), before the final humiliation and disgrace at the Banking Royal Commission. A litany of mistakes, poor decisions and underperformance over the last two decades – an absolute dog.
AMP: one-year price performance
And this continued on Monday when the AMP announced that the sale of its life insurance business to Resolute Life, a “buyer of last resort”, was unlikely to proceed. The regulator in New Zealand, the Reserve Bank of New Zealand, wouldn’t sign off on the deal unless Resolute agreed to hold separate “ringfenced” New Zealand assets against the New Zealand insurance liabilities. This made the deal unattractive to Resolute and they bailed on the transaction.
This means that AMP will either have to keep the capital intensive life business, increasing the likelihood of a capital raising and diverting management’s focus from AMP’s new strategy, or do another deal with Resolute. This would come at a much lower price, partly because of the cost of the ring-fencing, but also because AMP says that since the deal was done, valuation changes and the Government’s Protecting Your Super legislation (which bans insurance on inactive super accounts) have wiped about $700m from the value of the life business.
The irony is that prior to the announcement, a handful of fund managers had criticised the Resolute deal and were arguing that it shouldn’t go ahead without shareholder approval. They were silenced by the market reaction, with AMP’s share price tumbling to $1.80.
AMP also announced that it was abandoning any plans to pay an interim dividend.
That’s the $64 question. Looking at the brokers, they have a consensus target price of $1.97 (range of a low of $1.50 to a high of $2.35). See Table below.
Source: FN Arena, as at 17 July 2019
That’s of course a 12 month share price target and is based on earnings from continuing operations. However, another scenario is that AMP is broken-up and key business units are sold.
These would include AMP Bank, with its 110,000 customers and $20bn in assets. In FY18, AMP Bank made a net profit after tax of $148m. Valuing this on a multiple of say 10 times earnings, this gives it a valuation of around $1.5bn or approx. $0.50 per share.
Then there is the investment management business, AMP Capital. As at 31 December 2018, it managed assets of $187bn and contributed $167m in after tax profit. Although it is being impacted by investor outflows due to “AMP brand damage”, the AMP Capital team is widely respected. This business could be worth another $0.50 to $1.00 per share.
The sale of the legacy life business to Resolute was originally priced at $3.3bn. Only $1.9bn of this was in cash, with Resolute making a $300m capital contribution and providing a further $1.1bn in non-cash consideration (mainly an upside for AMP of future earnings). Taking away the $700m diminution in value and other factors, the life business is possibly worth around $2bn – about $0.70 per share.
AMP has a NZ wealth management and advice business (which boast operating earnings of A$40m) that is slated to be sold via an IPO, and of course, the Australian wealth management and advice business with its thousands of financial planners, affiliated licensees and hundreds of thousands of clients. Who knows what this is worth, or what parts are even saleable?
Putting these together, a “break-up” of the parts valuation is north of $2.00.
Importantly, AMP hasn’t made any decision to go down this path (apart from the sale of the life business). But it is not hard to foresee a scenario where through growing market pressure, the Board is forced to confront this option. If the share price stays under $2.00, the calls will get louder.
The major brokers aren’t enthusiastic about AMP, with only ‘neutral’ and ‘sell’ recommendations (see Table above). A number see risks “tilted to the downside”.
The main concerns centre around the possibility of a capital raising, increased advice remediation provisions, further delays to the “turnaround story” and a capital intensive and less agile life business diverting management’s focus from re-shaping the wealth division.
There aren’t too many upsides mentioned.
I would like to say that the AMP is a “buy”, but I am not convinced the knife has stopped falling. Firstly, AMP hasn’t bounced quickly away from $1.80, which suggests there is institutional selling meeting retail bargain hunters. Secondly, I just don’t buy the story that AMP’s Australian wealth management business can be readily “turned-around”. Unless AMP can develop a market leading customer proposition or pricing offer, the crisis caused by “loss of trust” could be irreversible and terminal. Finally, I just have a sneaky feeling that we might see $1.50 before we get back to $2.00.
If the market starts to talk about a break-up and the AMP Board embraces the thought, it could be a different story.