The Straw that broke the Camel’s back
What had been a lacklustre past year for AMP (ASX:AMP) shares become a terrible one as the “Fees for No Service” scandal unveiled during the Royal Commission become the straw that broke the camel’s back and saw a mass investor exodus, sending the stock to multi-year lows. While the issue has been another body blow for shareholders, the pressure for accelerated changes has seen a clear out at the top of the company that we view as welcome. The new Chairman David Murray is highly respected and brings the right type of skill set to lead the turnaround necessary to regain investor confidence.
Turning to the technical picture and on the daily chart, the bearish moving average crossover present since September 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. Significant technical damage has now been done, and some base building will now be needed above the $4 mark. In order for the short-term technical outlook to improve, a decisive break above the 200-day moving average (green line) is also required.
What it’s all about…
The furore that has been the primary catalyst for the recent sharp sell-off of the stock over the past six weeks and rolling of heads at AMP relates to the charging of fees to customers when no service was provided.
For AMP (ASX:AMP), this was revealed to have been done both by AMP advisors and licensees. While this was an industry-wide issue AMP was firmly in the crosshairs at the second-round of the Royal Commission hearings concerning financial advice. The revelations were widely publicised, further damaging investor sentiment towards the sector and particularly AMP. The company also acknowledged its communications with the regulator (ASIC) had been misleading.
On April 20 AMP released a statement apologising “unreservedly” for the misconduct and failures in regulatory disclosures of the advice business. Among other measures, the AMP Board also announced that it had agreed with CEO Craig Meller that he would step down with immediate effect, bringing forward his previously announced departure from the business, which was slated for the year of 2018. Group general counsel Brian Salter agreed to take leave during the review. Non-executive director Mike Wilkins stepped into the breach as interim CEO until the search for a new CEO is completed.
Mr Wilkins has more than 30 years’ experience in the financial services industry in Australia and Asia, with 20 years’ experience as a CEO for ASX100 companies, including being the former managing director and CEO of Insurance Australia Group.
In the same April 20 release AMP (ASX:AMP) announced a raft other measures being undertaken to respond to the issues raised, including addressing the issue of the independence of the Clayton Utz report. The measures announced included customer remediation, and a raft of external reviews and investigations. The company also withdrew a resolution relating to an equity grant to Mr Meller that would have gone to a vote at the Annual General Meeting to be held this Thursday (May 10).
The blood-letting hasn’t stopped with the departure of Mr Meller, with the announcement on April 30 that Chairman Catherine Brenner had stepped down from the Board effective immediately. Today, a further three board members announced their resignation, with two stepping down ahead of the AGM and the third, offering to serve until the end of 2018, “recognising the need for a measured process of board renewal.”
With reference to the monthly chart, a downtrend has ensued since early 2015, leading to softer price-action. For the long-term technical outlook to improve, we need to see a sustained move back above the 78.6% Fibonacci retracement of $4.30 in the first instance.
AMP’s submission to the Royal Commission released on May 4 reiterated the company’s “unreserved apology for the failings in respect of advice and service delivery” to their customers. While the submission acknowledged the inappropriate charging of fees and that its communications with the regulator had been misleading, it pushed back on some fronts including “strenuously” denying the “allegation by Counsel Assisting that is open to find that AMP has committed a criminal offence in providing the Clayton Utz report to ASIC.”
AMP (ASX:AMP) provided a list of actions taken to strengthen governance and controls in the advice business and said the investments made in Goals 360 and Salesforce are designed to fundamentally change the way advice is delivered. This will improve record-keeping and compliance.
The same day (May 4) AMP announced the appointment of David Murray as independent, non-executive Chairman and this was a major step in the right direction. The former chief executive of CBA has wide-ranging experience, including previous chairmanship of the Future Fund and leadership of the Financial System Inquiry. He is known for getting things done and will bring a new broom to the business.Key on the agenda will be finding and appointing a new CEO that can help in the process of regaining investor confidence, addressing cultural change at AMP and maximising shareholders value from the company’s currently undervalued assets.
The turnaround will likely be a multi-year process but if we are right that ‘Peak Fear’ in the sector has been reached, we could also see a recovery in AMP’s share price much sooner.
Mr Murray is approaching the turmoil AMP is facing with a cool and pragmatic head.
He made some interesting comments over the weekend, saying that that the ‘vertically’ integrated model in the financial services sector is not ‘dead’ and that the system is not as ‘broken’ as some might think following the Royal Commission.
Mr Murray recounted in an interview with the AFR that “There is no industry you can consider that doesn’t have issues, but the royal commission tends to bring them forward and throw them out in a way that deals with the most egregious…It gives people the impression that [the] system is more broken than maybe it is.”
“The issues that have got to be dealt with are the way in which advice is given, the way in which it’s remunerated, the way in which advice and product work together in those models…The financial system is at risk now of losing the confidence of the community and that won’t change unless the major pillars in that system each do something to restore confidence in their own constituencies.”
He makes some good points and his comparisons with the scandals in the vehicle industry were also notable.
Summary
After the sharp fall in the share price over the past six weeks, AMP shares are trading on approximately 12 times forecast 2018 earnings, falling to 11.5 times in 2019. The projected yield over the same time frame is 6.9% expanding to 7.1%. This reflects the turmoil engulfing the company and the AGM this week will see stern questions from shareholders.
Positively AMP has a strong capital position and its strong market position will endure in our view.
AMP (ASX:AMP) had level 3 eligible capital resources $2.3 billion above the MRR (minimum regulatory requirement) at the end of 2017. 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. Mr Murray 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.
AMP (ASX:AMP) will remain held in the Fat Prophets portfolio at this juncture.
