Hitting Reset
AMP (ASX:AMP) shares traded lower last Friday after the financial services giant announced a series of actions to ‘reset’ the business in the wake of the Royal Commission. As part of this broader resetting of the business some $290 million (post-tax) has been set aside for “potential advice remediation” and this will weigh on first half profit. A smaller dividend is also on the cards. While it has been a horrid 2018 so far for AMP shares and we cannot be certain that there won’t be any more skeletons to emerge. At current prices, expectations are so low it won’t take much for the shares to begin climbing out of their current trough.
Positively, AMP has a strong financial position, which it reiterated in last week’s announcement.
The company expects to report level 3 eligible capital surplus above the minimum regulatory requirement (MRR) of about $1.8 billion for 30 June 2018 date. That includes the impact from the provision for advice remediation (customer compensation) and other one-off costs and changes announced. To retain capital and strategic flexibility in this period of change, AMP did say it intends for its total FY18 dividend payment to be towards the lower end of its 70-90% guidance range, meaning the interim dividend may fall below the bottom end of those figures.
AMP (ASX:AMP) also guided towards first half underlying profit to be in the range of $490 million to $500 million.
Profit is expected to benefit from growth across AMP’s core “growth businesses,” offset by weakness in the Australian wealth protection (life insurance) business. The latter includes a recent deterioration in experience and capitalised losses. The largest impact was a $20 million one-off negative experience loss linked to reserve strengthening on a large group plan, terminated on 01 July 2018. This was flagged in AMP’s FY17 results. As far as downgrades go, this wasn’t a particularly bad one, comparing to $533 million of underlying profit a year ago and the $520 million or so the market was expecting.
AMP (ASX:AMP) has lost the trust of investors and its brand has taken a beating given revelations from the Royal Commission. Still, we believe claims by doomsayers that the AMP brand is finished are likely way off the mark, although it could prove to be a long road back. Shareholders may not need to wait that long though, as often in these situations, battered shares will rise on anticipation of relative improvements ahead of actual events. Accordingly, we recommend holding the shares.
Reset actions
AMP last week outlined several actions they are taking to reset the business, prioritise customers and strengthen risk management systems and controls. Commenting on the actions, acting CEO Mike Wilkins said: “Today’s announcement reflects our commitment to take decisive action to reset AMP and establish a platform from which the business can recover rapidly. We’re facing squarely into the issues that have impacted our reputation and the community’s confidence in AMP,” and went on, “Our remediation provision responds to industry-wide issues raised by ASIC in its reports 499 and 515 and reflects a conscious business response to increased community expectations. This remediation program is complex as it will address both employed and aligned advisers, and we understand it is one of the first programs to do so. We are working on the program with our advisers, the vast majority of whom are dedicated, professional and committed to meeting the advice needs of their clients.”
The headline action was a provision of $290 million (post-tax) for potential advice remediation (customer compensation) linked to the 499 and 515 reports. The 499 report related to the “fee for no service” scandal (it was found AMP had charged many clients for financial advice that was not received) and 515 was a review of how the large Australian financial companies manage their advisers. The program is expected to cost $150 million after tax to administer and costs will be expensed as incurred. AMP intends to pursue potential recovery options to partially offset these costs going forward.
Other costs outlined include investment to beef up risk management and controls, expected to cost about $35 million (post-tax) for the next two years. Another $55 million of one-off costs are to be incurred in 1H18 related to “the Royal Commission, portfolio review and costs of accelerating the advice remediation,” to be booked below underlying profit. AMP will also cut fees for around 700,000 super customers to AMP’s flagship MySuper products in 3Q18. That will result in lower Australian wealth management investment related revenue by an annualised $50 million from FY19 and an estimated $12 million in 2H18. This move comes after BT Financial cut fees.
Finally, AMP (ASX:AMP) said it will prioritise a review of its “manage for value” businesses and is “in active discussions with a number of interested parties.”
Turning to the technical picture and on the daily chart, the bearish moving average crossover present since April is suggestive of momentum to favour the downside. This is when the 50-day moving average (red line) crosses below the 200-day moving average (green line). Initial support at the February low of $4.74 has also given way as has that at $3.53. Significant technical damage has now been done, and some base building will now be needed and towards the $4 mark in order for the short-term technical outlook to improve.
With reference to the monthly chart, a downtrend has ensued since early 2015, leading to significantly softer price-action. For the long-term technical outlook to improve, we need to see a sustained move back the 2011 low at $3.61.
Summary
After the sharp fall in the share price in 2018, AMP shares are trading on approximately 17.9 times subdued forecast 2019 earnings, falling to 10.4 times the next year when earnings ‘normalise.’ The projected yield is 5.6%.
The reset of the business outlined last week comes at a considerable cost, but necessary, and should go a long way towards finally getting the business back on side with investors over time.
Positively AMP (ASX:AMP) has a strong capital position and its strong market position will endure in our view, albeit dented.
AMP is expecting to have level 3 eligible capital resources $1.8 billion above the MRR (minimum regulatory requirement) at the end of June 2018. This was strengthened by the second reinsurance program announced in 1H17.
Accordingly, with the right people in place we see the potential for a solid share price recovery. The appointment of Mr Murray as Chairman fits the bill in our view and the appointment of a strong CEO or other restructuring, such as the sale of the life insurance business, could be the next catalyst. It is also possible AMP has been overly conservative with its provisional costs and this could benefit results down the track. On the other hand, AMP (ASX:AMP) is facing several law suits and has no provisions in place for those. An adverse outcome from one or more of those could be a significant negative, depending on the quantum of damages should AMP lose. AMP has said it will vigorously defend against the class actions.
AMP (ASX:AMP) will remain held in the Fat Prophets portfolio at this juncture.
