AMP was demutualized nearly 20 years ago, about 140 years after it was founded.  At the time of listing I actually worked for AMP Financial Planning.  The office was abuzz the day as AMP came on the boards, it traded up and up and up to nearly $20; in fact, it went higher a few weeks later, touching $25. The great Australian mutual was demutualised and the future looked amazing as a newly public listed company!   Fast forward to today and you can buy the same name company for about 10% of its all-time high, about $2.50 per share. In 20 years of being listed there have been lots of highlights, unfortunately most of them have been bad.

As the old saying goes, ‘Everything has a price’. Is $2.50 the right price to buy AMP?

It starts from the top!

Over the past six months the entire board and most of the senior management of AMP have been shown the door. David Murray AO is now the chair of the board, David of course was the foundation chairman of Australia’s Future fund and the previous CEO of Commonwealth Bank from 1992-2005. In our opinion he is the perfect Chairman for this role. The first point of order for David was finding a CEO that could drive recovery and then growth, and just this week Francesco de Ferrari started as CEO.

Over the past six months the entire board and most of the senior management of AMP have been shown the door. David Murray AO is now the chair of the board, David of course was the foundation chairman of Australia’s Future fund and the previous CEO of Commonwealth Bank from 1992-2005. In our opinion he is the perfect Chairman for this role. The first point of order for David was finding a CEO that could drive recovery and then growth, and just this week Francesco de Ferrari started as CEO.

De Ferrari comes to AMP as a so-called proven change agent, he has extensive experience in international wealth management and redesigning business models will be critical in creating the AMP of the future.  De Ferrari spent 17 years in executive roles at Credit Suisse in Asia and Europe.  If he is the right person, only time will tell. But new blood into these roles is a very positive sign for the recovery of AMP.

It seems like the new team at AMP  understand what type of public sentiment problem they have after the Royal Commission, as AMP launched a program in July to repair its reputation and “earn back trust” by compensating customers for lost earnings, strengthening risk management systems and controls, and cutting fees on its superannuation products. When Francesco De Ferrari met AMP employees on his first day as chief executive on Monday, he had four key messages – be optimistic, take advantage of opportunities, be agile and listen to customers.

That sort of upbeat approach is just what the doctor ordered. A mood of doom and gloom has pervaded AMP ever since the wealth manager’s former head of advice, Jack Regan, made stunning admissions at the Hayne royal commission in April this year. So, if change is about starting at the top, AMP has got a big tick.

Quick decision to sell off insurance assets

The media and the funds management industry has loved debating the topic of the decision for AMP to sell off its insurance division and also its wealth protection business in NZ.  We are of the view that it should have been sold for more, but really, we are not in a position to know, nor are financial journalists. The decision has been made, and apart from the price we think it is a good move, as it simplifies the model substantially. Commissions and conflicts of interest are hard to control in investment products but in insurance products they are impossible, something that has not progressed in 40 years.  Many products still pay 110% of their first year’s premium as a commission to the adviser.   And when it comes to the client claiming a benefit, insurers will still do everything they can to not pay.  The insurance industry will continue to be disrupted by more nimble fintech’s, as a result it is a good long term move for AMP to be out of this end of the market. What remains is a simpler AMP business.  The three core growth businesses AMP Capital, AMP Wealth and Platforms and the AMP Bank.

Don’t discount the sales force

AMP has more financial advisers under their wings than any other company in Australia, in fact 20% more than the next biggest, IOOF. What the market is not understanding is the close relationship that many clients have with their AMP adviser, in fact some clients mightn’t even be aware that they are with an AMP adviser due to the various brands they operate under. Typically relationships are very close and it would need to be very powerful news to break the adviser client relationship.  Even in my time with AMP, the two key messages they taught every adviser was to foster close and caring relationships with clients and then how to sell solutions (with of course AMP products).  They had the sales process down to a perfect art. The products and service might need to change in the future, and we are sure de Ferrari is working on that at the moment, but their ability to service and sell is not in question.  The share price is saying that the Hayne inquiry will spell the end of AMP’s business model for financial advice. It is hard to see that happening but if it does there is still plenty of upside in the existing businesses.

AMP Capital

Go back to the investor report released by AMP in February and you will see very bullish forecasts about the company’s growth businesses. Former CEO Craig Meller said AMP Bank was expected to double in value over five years and AMP Capital, the jewel in the crown, was “targeting double-digit earnings growth through the cycle”. The same investor report said AMP was targeting earnings of about $50 million a year from its China joint ventures with China Life. China Life Asset Management Company is the fastest-growing new asset management company in China, while China Life Pension Company ranks first in trustee services and third in investment management market share.

Capital to be distributed or redeployed?

De Ferrari has an opportunity to reignite the capital return strategy previously so successful for AMP, because of the deal already done to sell their Australian wealth protection, Australian mature and ultimately its New Zealand wealth protection and mature business.

The company has already flagged a capital return in 2019 of 40¢ a share. The successful sale of the New Zealand operations should allow another capital return of 40¢ in 2020. In addition, AMP should be able to pay an annual dividend of 20¢ a share in 2019 and 2020.

This is a strategy that Andrew Mohl did very well post the near collapse of AMP at the start of the century.  He sold down non-performing assets and distributed the capital to AMP shareholders.  Essentially if the above is true an entry price of $2.50 could be reduced to $1.30 in under two years if you take the dividend and potential capital distributions.

AMP Wealth is, by all accounts a good business, it has assets under management of $192.4 billion and about two-thirds of this comes from internal channels such as AMP-aligned financial advisers. This division most recently has been in fund outflow, which is expected given the heat AMP has been feeling from the Royal Commission. The key question for investors in AMP is how long before AMP can regain the trust of investors and stem fund outflows.

AMP Bank has a lending book of about $20 billion and the loan book saw a small decline for the first time since 2015. This division carries the same risks as the other retail banks in the potential for bad debts. But put aside, banking is a very good business.

The Risks – there are many!

Risks for AMP include De Ferrari not being able to restore the company’s reputation, continued fund outflows, a financial market downturn that decreases fee revenue from funds under management and bad debts from the banking division – not to mention the outcome from the royal commission with respect to vertical integration and other issues.

Recommendation – can’t do anything else but buy!

If AMP can get out of the woods, it should subsequently be re-rated to around 15 times earnings, assuming no deterioration or improvement from other divisions, the share price could be $4.50 (15 times 30¢ per share earnings).  Noting the CEO will receive a large incentive if the share price reaches $5. The dividend yield for investors with an entry price of $2.50(or $1.30 if you take in consideration the dividends and capital returns over the next two years) would also be very attractive under this scenario.

At these prices it is isn’t just us that think it is attractive. At its current market capitalization of $6 billion, AMP is worth only slightly more than it was at the depths of the financial crisis and is just 20 per cent larger than regional lender Bendigo and Adelaide Bank on those simple comparisons, it would seem AMP is more likely to be worth more in the future. In the last two weeks it is rumored Macquarie Bank have been putting their ruler over every part of AMP, and we are sure there are many more doing the same thing.

We have turned very positive on AMP, and believe all the risks plus more are priced in.  AMP advisers are a marketing and selling machine, the question is what AMP will give them to sell.  Anyone that holds AMP we think it is a perfect time to double down, and anyone that doesn’t a perfect entry in.