AMP: difficulties now, but dividends later

-- | 27/11/2020

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Lex Hall: Hi, I'm Lex Hall for Morningstar. AMP has been mired in scandal of late. It's still dealing with the fallout from the royal commission including damning allegations of financial misconduct and more recently a sexual harassment scandal has led to a boardroom shakeout which has capped two terrible years in which the stock has lost three quarters of its value. But in the past few weeks, it's been the target of a US equity firm. Could things be looking up for the 171-year-old wealth manager? With me to discuss that is Morningstar analyst Shaun Ler.

Shaun, thanks for joining us today.

Shaun Ler: Thanks, Lex. It's a pleasure.

Hall: With all this—AMP has had such a horrible run, why would a shareholder, an investor, and why would a private equity firm want to buy or buy into this company after all it's suffered?

Ler: Well, Lex, first of all, I think investors should realise that AMP is not just its financial advice business. It's made up of financial advice comprising of Australian Wealth Management and New Zealand Wealth Management. It's also got an asset management business called AMP Capital, as well as a banking business called AMP Bank. So, in analysing AMP I feel that sometimes investors tend to focus on the bad sides of a particular division and ignoring the merits of its turnaround and the quality of its other assets. Like, for example, the share price before, in my view, was too pessimistic, so it extrapolates AUM and market share losses for a very prolonged period. However, if we look beyond the noise, AMP has some quality assets that have very good growth prospects. For example, the flagship AMP North platform is one of the most comprehensive platforms in the market. It has seen consecutive net inflows to help offset outflows from AMP's legacy products. And of course, AMP capital is the obvious crown jewel. It is the highest-returning business out of AMP's cross segments. It has a good track record of managing real assets and at least two-thirds of investors reinvest their money after funds are liquidated after asset sales. Investors would no doubt be concerned about several issues which are facing AMP recently. You've got staff departures; you've got AMP being named as some of these—AMP's products being named as some of the more poor-performing super funds. You've got the upcoming budget impacts on AMP. Now, in my view, these are insufficient to affect the group's earnings outlook as hoped.

Hall: Let's talk about the Ares bid. Who is Ares, first of all? A US private equity firm, that's all we seem to know for the time being.

Ler: Yes. So, Ares, is an alternative asset manager based in the US It specialises in credit, private equity and real estate investments. So, in terms of the credit space, it focuses on direct lending, alternative lending, liquid lending. It has about A$255 billion in AUM, by Australian dollars. And that's about 25 per cent larger than AMP Capital as a whole.

Hall: OK. What did you make of the bid? Do you think it's an enticing bid or…?

Ler: Well, Lex, I think I've mentioned before that prior to the bid I felt that investors were underestimating AMP's growth potential and its growth outlook. And definitely, if we look at the bid price today at $1.85, we think is definitely above our fair value estimate and is, I guess, a testament that affirms AMP's growth prospects.

Now, at present, I do not expect Ares to pull the offer because I feel that they are serious about AMP. Now, naturally, if you think about it, AMP Capital, especially its real asset business, feeds Ares' DNA. Ares is very US-focused. Most of its clients are in the US; it's got a small clientele in Asia and Australia. In contrast, AMP Capital's funds are mainly sourced from Australia and New Zealand. Now, Ares could potentially use AMP Capital to expand its global footprint and drive growth. And based on my understanding from media reports, if Ares is pursuing AMP directly, buying its balancing, we suggest that it's keen to own AMP's assets. Now, Ares has also been eyeing AMP for quite some time and has also approached AMP in September.

Hall: OK. Let's finish on the dividend front. How is AMP looking as a dividend payer, Shaun?

Ler: So, look, Lex, the lack of dividends is no doubt disappointing for many shareholders, but our (indiscernible) out there. I believe the worst is behind us and there is currently more room for AMP to declare dividends moving forward. Now, if we think about historically, AMP has been faced by several issues. For example, having to hold a lot of capital against the life insurance business, which is very capital intensive and it's its lowest returning business in the group. Number two, you've got the Royal Commission causing a lot of uncertainty on the future of remediation costs, class actions, legal proceedings, and more recently, you've got the coronavirus pandemic, which has affected investment markets causing fluctuation in investment earnings. All this means that AMP needs to be very prudent in the dividend payout ratio to make sure they have enough capital backing.

Now, things today are quite different currently. Logically, AMP is in a better spot to pay dividends. This is because, number one, it is much more capital-light following the AMP Life sale. We expect it to have a better cash flow profile to pay dividends. It no longer needs to worry about having to reinvest its earnings and pay out claims for the insurance business. There's also now much more certainty on remediation costs. With no further surprises in remediations moving forward and the program due to be completed by 2021. The investment markets have since stabilised after COVID-19. We have currently passed the worst period of uncertainty, so there's more scope to work out an appropriate dividend payout ratio. Naturally, the dividend payout will still remain relatively lower in the near term because AMP is still in a turnaround. They will need to keep some capital buffer to insure against any operational conduct or market risks, and it will also need capital for the reinvestment spend. But again, we remind investors that dividends will be higher in the outer years once the restructure is complete around 2022, when the business is more stabilised, when there's more certainty and when there's more room for capital returns.

Hall: OK. Shaun, we will watch this story unfold with great interest. Thank you very much for sharing your insights today.

Ler: Thanks for your time, Lex.

Hall: I'm Lex Hall for Morningstar. Thanks for watching.

This report appeared on 2021 Morningstar Australasia Pty Limited

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