This article was originally published on on August 10th, 2023

It’s been well-documented that AMP has had a difficult few years. The Royal Commission was a blow to the company (and a shock to the Australian public, for that matter), with revelations that the financial services player had been charging life insurance premiums and advice fees to more than 2000 deceased customers.

While AMP was hit with a $24 million fine earlier this year for the wrongdoing, the repercussions have been disastrous for the company’s share price. In fact, over the past five years, AMP’s share price has cascaded 67%.

AMP’s own “me-too” moment also wouldn’t have helped. Nor would the reported $100 million in damages it would have to cough up after losing a class action surrounding its financial adviser payout proposal this year.

And yet, Elston’s Andrew McKie believes the financial services player is now a buy. He argues CEO Alexis George, who replaced Francesco De Ferrari in August 2021, has managed to rebuild trust in the 174-year-old brand and helped steer the ship toward better cost management and potential earnings growth.

In this wire, McKie digests AMP’s latest 1H 23 results, shares why he would be buying the financial services giant today, and outlines why he believes the outlook for Aussie large caps still looks promising despite the challenging economic conditions ahead.

AMP 1-year share price performance compared to the ASX 200. (Source: Market Index)

Note: This interview took place on Thursday 10 August 2023. Elston was invested in AMP before this result. It has a 2.5% allocation to the stock. This is overweight compared to the market index.

Elston Asset Management’s Andrew McKie

AMP Ltd 1H 23 Key Results

  • Underlying NPAT in line with 1H 22 at $112 million
  • FY23 interim dividend of 2.5 cents per share, 20% franked
  • $302 million of corporate debt paid down in July 2023
  • Underlying EPS of 3.8 cents over the past 6 months, an increase of 11.8% from 1H 22
  • Provision of $50 million for Financial Adviser Class Action
  • Cost review complete – targeting $120 million in cost reductions by the end of FY25 (this will require a $120-150 million investment spend)
  • Total AUM grew 3.5% to $134.5 billion
  • AUM-based revenues down 8.8% from 1H 22 to $374 million
  • EBIT up 2.1% from 1H 22 to $147 million
  • $1.31 billion in cash on the balance sheet, down 11.4%

Key company data for AMP Ltd

Source: Market Index

1. In one sentence, what was the key takeaway from this result?

The underlying business is stabilising, and there’s good progress on the cost out, but the market won’t like the uncertainty with respect to the delay in the capital return.

2. What was the market’s reaction to this result? In your view, was it an overreaction, an under-reaction or appropriate?

I think it’s appropriate. It’s interesting that it was a negative reaction to start with and then it’s recovered. The initial negative reaction is understandable, given the disappointment from the delay to the capital return, and uncertainty surrounding the quantum of adviser litigation liability. Markets hate uncertainty. It’s like kryptonite for your share price. So that’s understandable. But the turnaround and the recovery of AMP’s share price today is appropriate as well given the stabilisation at the core of the business.

3. Were there any major surprises in this result that you think investors should be aware of?

I think the first one was the stabilisation in pricing for the platforms business and the Master Trust. The market should feel comforted that revenues are stabilising. AMP has invested heavily in fee reductions within the Platforms and the Master Trust divisions. And that’s strategically extremely important because if you invest in price, you get better gross flows. It also means it’s very hard for advisers to shift under best interest standards. It reduces outflows. So fee reductions can really drive net inflows.

And the second thing was the cost out guidance. If you project forward the cost out program and combine that with the stabilisation in revenues, there is a clear pathway to earnings growth in 2024 and 2025.

And then thirdly, it’s a significant business in Australia. It has $135 billion under advice on platforms. It has a thousand advisers. It’s still a very significant player in the advice landscape.

Trust in AMP is building. People have memories for only so long and then they move on. I think more in the industry, we talk about it all the time, but the actual mum and dads not so much. It’s still a reasonably well-known brand. And I think it’s all about execution and stabilisation of the core business, and that seems to be coming through in this result.

4. Would you buy, hold or sell AMP on the back of these results?

Rating: BUY

We would buy AMP today, firstly because it is less complex, and secondly due to the better cost management over the outlook period. Thirdly, there is now a clear pathway for potential earnings growth in the core business. Lastly, there will be some resolution on capital management in the short term. And they do have significant surplus capital, in the order of $900 million, that can be passed onto shareholders. So for those four reasons, we’d be a buy.

5. What’s your outlook on AMP and its sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

We like the regulatory-enabled and mandated growth in superannuation. We like the fact that household wealth is increasing. The Australian tax and superannuation regimes are complex and therefore, people need advice. So the demand for advice is clear and we think that will continue long term.

But then the supply side of the thematic is positive also, post Royal Commission. We’ve seen a reduction in advisers, so the advice supply side is constrained. And the Quality of Advice Review will enable the simplification of advice businesses and a better client experience. So, with solid demand for advice, constrained supply and a better client experience, we think the sectors definitely worth investing in and AMP is a significant player.

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX right now? Are you excited or are you cautious about the market in general?

Rating: 3.5

We are cautiously optimistic, particularly in our large-cap universe. The big end of town is probably better placed to navigate the economic slowdown ahead and can better sustain its revenues. They’re also going to be able to leverage technology to enable efficiencies and productivity gains. And thirdly they’ve got pricing power. So, in an inflationary environment, if they’re in a dominant market position, they can pass those higher costs on with price increases. We think that there’s justification for current valuations, particularly in the big end of town, the Australian large caps.

Also, from a top-down view, we believe that there are unlikely to be further interest rate increases from here – or not material ones.

However, on the negative side, our first observation is there are pockets of overvaluation. And secondly, how well will the economy digest the rapid interest rate increases to date? What will be the consumer behaviour and the impacts on business because of potential indigestion?

We don’t think the earnings impact is going to be as bad as many predict. It depends on a business’s customer base. If you look at the age group, it’s the 30 to 45-year-old cohort that’s really been impacted by interest rate increases. But the older cohorts have probably got more income than they’ve ever had in terms of rent, interest income, dividends and so on. So you can’t broad-brush the economic picture.

10 most recent director transactions

Source: Market Index

If you would like more information, please call 1300 ELSTON or contact us.