EUR 850.00 For Business Accounts Only

Morningstar | Disgruntled Shareholders Prompt Further Details from AMP on Life Business Sale, But FVE Unchanged

Shareholder concerns over the low price and lack of transparency over the life business sale prompted narrow-moat AMP Ltd to provide more details on the sale and the impact on its underlying business following the sale. The company is at a major inflection point, with a totally new business structure. Its also facing considerable regulatory and political risks stemming from the Royal Commission and is poised for a potential new strategy from the incoming CEO. In these circumstances, the continued lack of transparency exhibited by AMP management underscores our Poor stewardship rating. Notwithstanding, the new details have not resulted in a material change in our longer-term outlook and our fair value estimate remains at AUD 2.85.

AMP provided more clarity that it proposes to return the net cash proceeds received on settlement of the sale to shareholders. The net cash, after payment of debt, separation costs and other costs is expected to total about AUD 1 billion. While AMP did not specify how it would return these proceeds to shareholders, we had already forecast the company will conduct a share buyback. Therefore, this clarification does not have an impact on our model.

However, now AMP indicates they propose to remove the full AUD 40 million of additional stranded costs in the life business by the first full-year post separation in 2020. We have taken a more conservative approach and progressively reduced the stranded costs to AUD 20 million by 2022. We have taken this approach due to the high degree of uncertainty around AMP’s future stabilised operating costs. Potential additional costs could be prompted by the Royal Commission final report or by the incoming CEO; including costs relating to systems changes like stronger monitoring of advisers and platform functionality.

AMP also indicates it intends to find revenue replacement and/or cost management to compensate for the expected AUD 80 to 90 million per year reduction in aftertax operating earnings in its wealth management business following the sale of its life businesses. We do not believe it will achieve this offset and continue to forecast a reduction in wealth management aftertax earnings of AUD 80 million per year. We believe the net cash outflows in its wealth management business since AMP’s appearances at the Royal Commission provides tangible evidence of material reputational damage, which we expect will make it unlikely management will be able to find revenue offsets.

Specifically, there was AUD 1.485 billion of net cash outflows from its wealth management segment in third-quarter 2018. Just prior to AMP’s disastrous first appearance at the Royal Commission in April 2018, the net cash outflow out of its wealth management business was AUD 200 million (in the first quarter 2018). Therefore, there has been an increase of more than 7 times in the net cash outflows from members/investors in its wealth management business following its appearances at the Royal Commission. We believe it will be difficult to reverse this level of reputational damage and find new revenue streams. AMP will first have to reconstruct its reputation as a trusted financial advisor, which is likely to take several years. This translates into lower assets under management growth in its wealth management business, which we expect to at grow at CAGR of 3.5% in the next five years, compared with a growth rate of nearly 9% in the past five years.

Some AMP shareholders have also complained about price obtained by AMP for the sale of its life business and the lack of disclosures on the sale. We think the fact AMP was forced to provide further details on the sale and the impact on its underlying business is evidence of the lack of transparency in the original announcement. Some shareholders have also called for the sale to be reversed and threatened an extraordinary general meeting to achieve this. While we agree the sale of the life businesses was done below a fair value, we think there is little prospect now for reversing the sale and have not included this outcome in our modelling.