The long and winding road to the demerger is becoming clearer and nearer as AMP gave details of its strategy with new CEO Alexis George at the helm. The strategy involves much more than just cleaving off the Private Markets Co. which will list on the ASX in June 2022 (hopefully with a better name).
The new AMP strategy has in fact been underway for some time with a range of programs already nearing completion, others with plenty of hard work ahead. The sale of AMP Life (for $3 billion) is perhaps the most significant as it removes the original business that made AMP a household name in Australia for more than 170 years.
Regulatory changes, broader competition in financial markets and products, lower margins and increased digitisation have pummeled AMP’s business as it struggled to adapt. But this new strategy finally looks like achieving the realistic change needed to reinvent AMP as a serious player in the Australian financial services sector.
First, the demerger of PrivateMarketsCo (PMC) from AMP Ltd will allow the former to more appropriately run its $50 billion global infrastructure and real estate investments. AMP Ltd will retain a stake of up to 20% in PMC.
AMP Ltd will seek to simplify and improve its businesses, not least through the $300 million cost reduction program with a further $115 million committed to by FY24f.
AMP has guided to AWM ( Australia Wealth Management) revenue margin ending the year at 65bp and now expects FY22f to decline by 10bp, softened by a reduced loss rate in the Advice division by 50%. AMP noted the adjusted loss rate in the Advice business is around $140 million net profit indicating the scale of the improvement possible. This will be achieved through the sale of AMP’s employed Advice business (approx. $15-20m) and cost reductions of $30-35 million. AMP is aiming to make the Advice business break even by FY24f. Another $20 million of costs can be extracted from the Master Trust business by FY24f.
A clear emphasis is being placed on growing AMP Bank with the mortgage book (currently $21 billion) expected to add 10-15% pa to FY24f, an implied 2-3x system growth. AMP will need to sharpen its pricing to achieve that sort of growth which will impact its net interest margin, last reported at 1.71% compared to the average NIM at the big four major banks of 1.86%.
The New Zealand Wealth Management business has made substantial progress towards being an efficient standalone business.
Investment view
As the dust settles on a busy few weeks of announcements from AMP, the stock is trading on less than 10x FY22f PE ratio with a meaningful EPS growth outlook. The demerger process is revealing much more information about the two businesses giving investors greater certainty as to what they will own. This should be a catalyst for the market to reassess the prospects of each company. There is plenty of execution risk involved and AMP must deliver on the strategy so investor caution is understandable. But we argue that there is now more upside to this story providing contrarian investors with an opportunity to own a good revitalisation stock.
