EUR 850.00 For Business Accounts Only

Morningstar | AMP Continues to Disappoint With a Profit and Dividend Reduction; FVE Reduced

AMP Limited continues to disappoint guiding to underlying net profit after tax, or NPAT, of AUD 680 million in fiscal 2018, leading to a reduction in our fair value estimate to AUD 2.60 per share from AUD 2.85. The company’s underlying NPAT guidance is muddled by the fact that it includes the losses of the businesses being sold to Resolution Life and by the fact that it only provides aggregate figures. Stripping out the NPAT of the business being sold, the aggregate underlying NPAT of the retained businesses (Australian Wealth Management, AMP Capital, AMP Bank, and New Zealand wealth management) for fiscal 2018 is guided to be AUD 729 million, below our forecast aggregated underlying NPAT for these businesses of AUD 742 million. The lower-than-expected underlying NPAT of the retained businesses is the primary driver of the reduction in narrow-moat AMP’s fair value estimate to AUD 2.60 per share. The final dividend of AUD 0.04 is also lower than the AUD 0.08 expected and leads to a full-year dividend of AUD 0.14.

We expect the lower-than-expected dividend is a result of the uncertainties the company is facing and the deterioration in the surplus capital position above its Level 3 minimum regulatory requirements, or MRR. Its surplus over the MRR fell to AUD 1.6 billion at 31 Dec. 2018, from AUD 1.81 billion at 30 June 2018 and 2.3 billion as at 31 Dec. 2017. The deterioration in the surplus capital position was driven by an AUD 240 million post-tax provisions relating to remediation of customers and losses in the business being sold. The businesses being sold to Resolution Life (Australia and New Zealand wealth protection and mature) incurred an aggregate NPAT loss of AUD 105 million for the second half of fiscal 2018. This NPAT loss was primarily caused by an AUD 180 million capitalised loss due to wealth protection assumption changes and AUD 50 million experience losses.

While Resolution Life assumes the risk and profit impacts from the sold businesses from July 1, 2018, AMP remains responsible for the operations and capital management of these businesses until the sale completes. This requires AMP to reserve AUD 100 million of capital until completion, expected in the second half of 2019.

We believe the uncertainties the company is continuing to face also likely led AMP’s board taking the prudent course of reducing the final dividend in order to preserve capital. It did reaffirm that it intends return to shareholders the majority of the net cash proceeds on settlement of the Resolution Life transaction, which we continue to forecast will be by way of an AUD 1 billion share buy-back. The most immediate near-term risk is the final report of the Financial Services Royal Commission, scheduled to be published after market on Feb. 4, 2019. We expect the report to be highly critical of AMP’s governance and conduct. However, the key risk remains the potential for the Royal Commission to recommend the dismantling of the company’s vertically integrated wealth management business model. While we think the most likely outcome is that a wholesale separation of its advice, platform, product manufacturing, and other businesses will not be recommended, we nevertheless expect the recommendations will lead to a reduction in the competitive advantage of operating this vertically integrated model.

There is also the uncertainty around the strategy of the new CEO Francesco De Ferrari, who has only just commenced his duties and has a mandate to be a change agent. His strategy will depend not only on the final recommendations of the Royal Commission but also on the political responses to the final report. The political risks are heightened by the fact that a pseudo federal election campaign has commenced, with the poll expected by the middle of May 2019. We propose to review the outlook for our wealth manager’s following the publication of the Royal Commission final report.