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Morningstar | AMP’s FVE Unchanged Following In-Line First-Half 2018 Results

Our fair value estimate for narrow-moat AMP Limited is unchanged at AUD 3.60 per share after its first-half 2018 results. Underlying net profit after tax, or NPAT, of AUD 495 million was in line with guidance. It also declared a 50% franked interim dividend of AUD 0.10 per share. This was lower than the payout target range of 70%-90% of underlying NPAT. However, AMP reconfirmed the total 2018 dividend at the lower end of the payout range, and we still forecast a full-year dividend of AUD 0.23.

AMP’s core wealth management segment's underlying NPAT of AUD 204 million for the first half was moderately better than expected, with higher revenue from SMSF administration and equity investments in advisor businesses offsetting continuing gross margin pressure. However, the key driver of the performance was strong operating cost management, which we expect will be difficult to replicate in the future due to higher compliance-related costs following the Royal Commission. The results were also the first chance to gauge the fund flow impact from the fallout of the second round of Commission hearings completed at the end of April 2018. Notably, wealth management incurred AUD 873 million net cash outflows in the half, compared with cash inflows of AUD 1.02 billion in first-half 2017.

While AMP has indicated that second-quarter 2018 was affected by weaker inflows and higher outflows because of the Royal Commission, it’s still too early to deduce a major trend from these numbers. The first-half numbers only capture two months of the fallout following the Royal Commission, and first-half 2017 inflows were inflated from changes in superannuation contribution limits coming into effect. The first-half net outflows were compensated by market performance and other movements totalling AUD 2.5 billion, leading to a small increase in FUM. Second-half 2018 fund flows will likely provide a better gauge of the sustainable impact of the Royal Commission on its wealth management business.

AMP’s other growth segments of AMP Capital and AMP Bank had mixed results relative to our expectations, with AMP Capital’s underlying NPAT growing slightly below our expectations but AMP Bank performing better than expected. The Bank’s underlying NPAT grew to AUD 78 million in the half, compared with AUD 65 million in first half 2017. This growth was primarily driven by higher net interest margins, or NIM, offsetting lower loan growth, although loan growth was above system growth. We still expect loan growth to moderate due to tightening credit standards following the Royal Commission and other regulatory initiatives, combined with Australian households currently holding historically high home loan debt levels relative to household disposable income. Australia’s lending market also remains competitive. This, along with higher funding costs, leads to the company guiding NIM to trend lower in second-half 2018.

AMP Capital’s underlying NPAT of AUD 94 million in the half compares with AUD 92 million in first-half 2017 and was driven by stronger-than-expected external FUM compensating for lower growth in internally sourced FUM. The company is attempting to expand this business by investing in new staff, which has also led to higher operating costs, affecting underlying NPAT.

As previously announced, wealth protection continued its run of poor performance. Increased claims relating to periods prior to its reinsurance cover led it to experience losses, and the business also suffered higher acquisition costs than had been expected. Changes to insurance assumptions also led to losses that negatively affected underlying NPAT. Wealth protection, the New Zealand business, and the mature business are AMP’s lower-growth divisions, which form part of the portfolio of businesses that the company is reviewing. AMP has reprioritised this review, and we still believe it is in shareholders’ best interests for AMP to exit these businesses. They distract management from the core growth businesses, and exiting them should improve AMP’s capital position in the face of continued uncertainties flowing primarily from the 2018 Royal Commission. However, the company may find it difficult to exit these businesses at a reasonable price, given perennial poor performance.

There was also only a paltry amount of information given on the other headwinds that the company is facing. AMP did not provide much detail on the five shareholder class actions filed against it, other than to indicate that the claims are yet to be quantified and that AMP would vigorously defend the claims. AMP is also still considering how to respond to the proceedings filed against it by ASIC regarding alleged churning of clients into life insurance products by its aligned advisors.

However, AMP did provide some information on concerns regarding a potential contingent liability stemming from its buyer of last resort, or BOLR, agreements. Under these agreements, AMP is obliged to acquire client registers from its aligned advisors for an amount generally between 3.5 times and 4 times recurring revenue, subject to being given six to 12 months’ notice and an audit. Currently, the pipeline of buybacks stands at AUD 90 million. Furthermore, AMP’s expectation is that the client registers are more valuable to it than the potential purchase price and therefore has not made a provision for the BOLR agreements. We also do not assume a liability for these agreements in our modelling.