AMP: Result 2017
AMP’s latest full-year result was as messy as ever, and perhaps the best news to come from it was that management is ‘well progressed’ in its plan to tidy things up. ‘All alternatives being considered’ in the review of its weakest businesses, it said, and it’s ‘in discussions with a number of interested parties’. An update will be provided at or before the AGM on 10 May.
The three businesses on the block are Wealth Protection (mostly term, disability and income protection insurance), New Zealand and Mature (which houses various products that are closed to new business and being run off).
As things stand, these businesses are being ‘managed for value’ (as opposed to growth, apparently, although as value investors we don’t really acknowledge a difference), but the market will be disappointed if some of them aren’t sold.
Risks have already been reduced (and capital freed up) in the Wealth Protection business following several reinsurance deals over the past couple of years. Underwriting profits have also been made easier to come by after more pessimistic assumptions were adopted in 2016. The result was an underlying profit improvement from $70m to $103m, but this was from a low base.
Profits from New Zealand and Mature were flat, at $125m and $150m respectively, with the 5% a year run-off in the latter offset by lower than expected claims and good investment performance.
The growth businesses – Australian Wealth Management, AMP Capital and AMP Bank – mostly justified that tag.
The best was again AMP Bank, which increased profits by 17% thanks to a 14% rise in the residential mortgage book and a slight increase in the net interest margin. Management noted, however, that there had been a slowdown in the second half due to the regulatory clamp-down on interest-only mortgages. Volumes are expected to recover this half, but profit growth in 2018 is likely to drop to the low teens.
AMP Capital increased profits by 8%, thanks largely to a $5.8bn turnaround in net fund flows – from an outflow of $2.9bn to an inflow of $2.9bn. This was mostly down to a net inflow of $5.5bn from external mandates (up from $1.0bn) – the highest since AMP Capital was formed in 2003. Infrastructure and real estate were particular beneficiaries, with notable investments including Indooroopilly Shopping Centre and Leeds Bradford Airport in the UK.
Australian Wealth Management, though, continues to struggle. Its most obvious problem is adviser retention, with a net 220 departures in 2017 following the 570 that left in 2016. Chief executive Craig Meller explained that last year’s 220 was comprised of about 600 leavers and 400 joiners, and that the leavers had relatively little assets under management and might have struggled to get the right qualifications.
He also pointed to the new ‘end-to-end goals-based advice system’ named Goals 360. Meller said that instead of providing a ‘single optimistic outcome to a customer, with 50 pages of caveats’, the new system helps advisers ‘stochastically model 1,000 scenarios for every client, and propose the client solutions that give them the highest chance of achieving their goals under that broadest range of scenarios, all delivered in a way that has compliance built in by design. For us, this isn't just a new system, it's actually a new paradigm of providing financial advice.’
Hats off to them for that, but we’ll have to wait and see what customers make of it. In the meantime, there was a $931m net fund inflow in 2017 (up from $336m in 2016) which, combined with buoyant markets, gave an 8% rise in assets under management (AUM) to $130bn.
After the expected annual margin reduction of around 5% (to 1.01%), though, fee income rose only 2%. Following the MySuper transition period management expects the annual margin fall to slow from about 5% to 3%, but it will still be a case of running hard to stand still. With a 12% rise in investment management expenses (largely due to a fee hike from AMP Capital), the underlying profit fell 2% to $391m.
Not so one-offs
Management put forward a figure for underlying earnings per share of 35.5 cents. However, that excludes various supposed one-offs, such as 'additional regulatory and compliance costs' (which management conceded were likely to be ongoing, but were contained within 'other items') and the cost of the strategic review being undertaken (see Table 2). Subtracting these gives earnings per share of about 34 cents. A final dividend of 14.5 cents (90% franked) will be paid, to give 29 cents for the year, within the targeted range of 70–90% of underlying profit.
That puts the stock on a price-earnings ratio of about 15 and a dividend yield of 5.6%, which doesn't look expensive. The valuation should become clearer when we hear more about the strategic review and any disposals. Even after that, though, the group's performance is likely to be dominated by Wealth Management, which is offering little sign of improvement. HOLD.
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