AMP dismay is well-founded, says Morningstar

-- | 17/07/2019

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Glenn Freeman: I'm Glenn Freeman for Morningstar. In this edition of "Ask the Expert" I'm speaking to our equity analyst Chanaka Gunasekera about AMP.

Chanaka, thanks for your time today.

Chanaka Gunasekera: Pleasure.

Freeman: Now, there's been some big developments in AMP in just the last couple of days with this potential sale of its Life division really looking like it's not going to proceed.

Gunasekera: Yeah, it's highly unlikely to proceed now. Given the actions the Reserve Bank of New Zealand, they want – as a condition precedent to the sale, they want to separate out the assets that are backing the New Zealand policyholder insurance policies. And both AMP and Resolution Life indicated that to do that will materially affect returns. So, it's highly unlikely to proceed in the current terms and we expect it just won't proceed at all.

Freeman: Can you just refresh our memories just to reflect how material to the overall AMP business is this Life division and indeed to our fair value estimate for the company?

Gunasekera: AMP has been a Life business since its inception over 170 years ago. So, it's known for its Life business. However, its Life businesses were lower growth businesses. It was focusing its attention prior to this sale on Australian wealth management, AMP Capital, which is their investment management arm and also AMP Bank. The management had identified those three businesses as growth business. However, obviously, Australian wealth management which includes their financial advice, superannuation funds and platforms, has been hit by the Royal Commission. So, moving forward, that's probably going to be lower growth. But the life business, sort of, fitting that, but it was one of the lower-growth businesses.

Freeman: Has the market already priced in this sale going through or is it still working its way?

Gunasekera: Well, (probably) yesterday, because the announcement was yesterday, I think the market had been anticipating the sale would go through. Now, there were a number of shareholders for AMP who were not happy with the sale price and also the lack of transparency around the sale. So, some shareholders maybe happy about the fact it's unlikely to proceed now. However, I suspect the market was pricing in a sale going ahead and now will have to reprice the sale not going ahead.

Freeman: How long was the process going through? I think it was kicked off around November of last year.

Gunasekera: Yeah, October/November last year. The AMP management had done a management review, a portfolio review and identified the Life business as the slower growth business and the fact that they want to focus their attention on their wealth management AMP Capital and AMP Bank and determined to sell that business to Resolution Life.

Freeman: So, what is the likelihood of the deal actually still going through? Or is it sort of 90% not happening?

Gunasekera: Yeah, it only happened – the announcement yesterday. We can't be 100% sure, but I suspect it's not going to go ahead. Purely because there was a lot of pushback on the sale price. The sale price was, I think, $3.3 billion and people thought some AMP shareholders didn't think they were getting value for money for that. Now, given the consequences of some estimate assumption changes and as well as some superannuation law changes, that sale price is likely materially reduce again. And also, the impact of the Reserve Bank of New Zealand's actions as well. So, that sale price is likely to reduce materially. So, I think it's going to be very unlikely for AMP management to satisfy everyone. In these circumstances, I suspect it won't go ahead.

Freeman: What sort of impact – like have you had the shift to what you view as a fair value for the company?

Gunasekera: It's currently trading at around about our fair value, but there's a high degree of uncertainly on its earnings going forward, primarily – not just only because of this sale not going ahead, but also because of the headwinds its facing. The Royal Commission did material damage to its reputation. And you can see that by the cash outflows not only in the last quarter, which was the March quarter, but also in the December quarter. The March quarter was the highest cash outflows in its history. And so, the reputation damage is there to see. And it's going to be very hard for them to change the business model to capture to improve their reputation to capture some of the more inflows into their core businesses.

Freeman: And just finally then, so where does this leave AMP now? Do they have to go back out to the market trying to sell this business unit that's unlikely at a reduced price yet again?

Gunasekera: Yeah. At the moment, what the management indicate – now it only happened yesterday – but the management indicate that if they can't sell it to Resolution Life, they are planning to retain the business. And so, they will retain it and manage it moving forward unless they can find another buyer. But I suspect that's very unlikely at this stage.

This report appeared on 2022 Morningstar Australasia Pty Limited

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