Winds of Change
AMP (ASX:AMP) announced in February that it had seen a strong swing back to profits in 2017, but the shares have been under renewed pressure in recent weeks. This has likely been due to a few factors, including the announced retirement of the CEO around the end of 2018, an increase in market volatility and a reported sell-down of by a major shareholder. Shareholders will be looking for more rapid change at the company, including a push into digital and the potential sale of the life insurance business.
Some new blood at the top in is order in our view and could help improve investor sentiment, as the announced resignation of CEO Craig Meller has introduced some doubt around the timing of any asset sales or further restructuring.
Both internal and external candidates from both domestic and international markets will be considered, but we believe an external candidate would be better received given the relative inertia at AMP in recent years.
Perpetual is reported to have been selling down a significant stake in (ASX:AMP) and that pressure should abate when its position is fully unloaded.
The sale of the life business or other units are potential catalysts for an upward re-rating, as would be an announcement on capital return initiatives. Meanwhile, the investment in technological capabilities such as the Goals 360 advice platform and Salesforce CRM should continue to be positive for the financial planning process for customer and advisors. This should help AMP better leverage its brand.
FY17 snapshot
AMP’s statutory profit attributable to shareholders of $848 million swung into positive territory from a loss of $344 million a year earlier, with the 2016 figure marking its worst result in a decade.
The closely monitored underlying profit result for 2017 impressed, more than doubling (+114%) from $486 million in 2016 to $1,040 million in 2017. The jump in underlying profit was driven by a recovery in Australian wealth protection earnings, a strengthening AMP Bank and partnerships in China helping boost AMP Capital earnings.
The following table shows the reconciliation of statutory and underlying profit for 2017 and 2016. Last year’s statutory profit was hit by a $668 million goodwill impairment associated with the Australian wealth protection business after changes to best estimate assumptions and was not repeated in 2017.
Source: Company presentation
The underlying profit metric is designed to ‘normalise’ earnings between periods and is what the company’s Board uses to set its dividends.
The company maintained its final dividend at 14.5 cents per share franked at 90%. The total dividend for the year of 29 cents per share was a 1 cent, or 3.6% increase on 2016. It marked a pay-out ratio of 81% on underlying profit and was approximately in the middle of the company’s target 70% – 90% pay-out range.
The following waterfall chart highlights the major contributing and detracting factors to the movement in underlying profit between FY16 and FY17.
Source: AMP (ASX:AMP) Company presentation
As can be seen in the chart above, the swing into profit from the Australian wealth protection business was the key driver, contributing $525 million in positive variance to underlying profit between the two periods.
That was supported by an 8% increase in AMP Capital (the investment arm, +$12m) operating earnings and 17% increase at AMP Bank (+$20m). Australian wealth management was a negative factor to the tune of $10 million, while New Zealand financial services and Australian mature operating earnings were both lower by $1 million each. Lower investment income dragged on the comparison by $27 million. Finally, lower group office costs helped to the sum of $30 million and lower interest expense on corporate debt by $6 million.
The underlying return on equity improved significantly to 14.3 percent in 2017, driven by the impact of capital management programs. AMP is targeting 15% return on equity in FY18.
The Group’s capital position is strong, with 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.
This begs the question of if, or when shareholders might see some capital returned to them and management was quiet on this at the time of the results.
More light is expected to be shed on this at the AGM in May as the company is still reviewing options for the Australian wealth protection, New Zealand and Mature business units. To this end, AMP is in discussions with “a number of interested parties.”
Looking at some of the key business units briefly, and the core Wealth Management business saw operating earnings dip by $10 million, or 2.5% from a year ago to $391 million in 2017. The slight decline in earnings was mostly due to margin compression from MySuper transitions, higher variable remuneration and a “reset” of the investment management agreement with AMP Capital.
Earlier in the year, the company warned of the pressure MySuper transitions would have on results, along with changes to contribution limits in the industry. The company completed MySuper transitions in the first half of the year, but because many of the transitions occurred at the end of the second quarter, ongoing pressure on unit earnings was expected to persist into the second half. Margins are expected to trend back to the long-term average from 2018. The cost-to-income ratio for the business unit crept up from 45.0% in 2016 to 46.1% in 2017.
There were some bright spots, with 10% growth in other revenue from Advice and SMSF speaking to the solid trend of gains in that area. And net cash flows to the wealth management business jumped 177% from a year earlier to $931 million in 2017, driven by strong inflows into corporate superannuation and member contributions prior to the limit changes at the beginning of July 2017. The corporate super platform fared well, with inflows up $436 million to $7171 million due to several mandate wins. The flagship wrap platform, North, had net flows of $5.7 billion, marking a 14% reported increase, but flows were up 28% if a one-time significant transfer in 2016 is excluded. Assets under management surged 29% to $34.9 billion.
Source: Company presentation
AMP Group’s 85% share of AMP Capital’s operating earnings was $156 million, up 8.3%. This was propelled by fee income growth of 7%, partially offset by a 5% increase in controllable costs. The increase in costs reflected international expansion, growth initiatives and investment in real asset capabilities.
It is the investment arm of the group, with investments across major assets classes such as equities, fixed interest, property and other classes. External net cash flows were very strong at $5.5 billion, representing a record for the unit and a multi-fold increase on the net flows of $967 million in 2016. There was significant interest in the fixed income, real estate and infrastructure offerings.
Assets under management (AUM) increased $22.3 billion to $187.7 billion, driven by investment returns, positive net cash flows, a one-off $10.3 billion transition and new investment.
AMP Bank
posted another strong result, with operating earnings surging $20 million, or 17% to $140 million.
Total revenue was also up 17% driven by expansion in the loan portfolio. The net interest margin (NIM) was up 3 basis points from a year earlier to 1.70%. The return on capital was 16.5%, which was approximately 0.2 percentage points lower than in 2016 due to a strengthening of the bank’s capital position to support loan growth.
Source: Company presentation
The Australian wealth protection business saw its performance stabilise in 2017, with operating earnings of $110 million swinging from a loss of $415 million in 2016. The 2017 result came on the heels of a strengthening of best estimate assumptions and a “comprehensive” reinsurance program in 2017 that effectively reinsured 65% of AMP’s retail life insurance portfolio. An improved experience result in 2017 more than offset lower profit margins (crimped by its reinsurance deals).
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). Should the bears remain in control over the near-term, then initial support is expected at the February low of $4.74 (horizontal solid-blue line). In order for the short-term technical outlook to improve, a decisive break above the 200-day moving average (green line) of $5.14 is required, as this would shift medium-term momentum back in favour of the bull-camp.
With reference to the monthly chart, a downtrend has ensued since early 2015, leading to softer price-action. Should the bears remain in control over the near-term, then support is evident at the 78.6% Fibonacci retracement of $4.30 (blue set of retracements). For the long-term technical outlook to improve, a decisive break above the 50% Fibonacci retracement of $5.61 (red set of retracements) is required. Should this occur, then upward momentum would strengthen and thus swing the pendulum in favour of further gains over the broader horizon.
Summary
After the recent dip in the share price, AMP (ASX:AMP) shares are trading on approximately 13.9 times forecast 2018 earnings, falling to 13.0 times in 2019. The projected yield over the same time frame 6.1% expanding to 6.4% and offers some support for shareholders waiting on more substantial change at AMP.
Given a strong balance sheet, with further excess capital accumulating in 2017 and more likely on the horizon, we believe it really will prove to be just a pause on the capital returns side. Any returns should see sentiment pick up again and an upward re-rating unfold, especially as sentiment is currently downbeat towards the stock.
Accordingly, AMP (ASX:AMP) will remain held in the Fat Prophets portfolio.
Disclosure: AMP (ASX:AMP) is held in the Fat Prophets Australian Share Income Model.
