Next Steps: Costs

RESTRUCTURING

Need To Know

• Sale of AMP Capital real estate and domestic infrastructure business for $225m complete
• New cost out program flagged. We estimate AMP has ~$800m controllable cost base
• AMP buyback has resumed. Share price looks oversold, with clear catalysts ahead. 

Three important updates from AMP this week. 

1)     The phase 1 completion of the $225m sale of the AMP Capital real estate and domestic infrastructure business to Dexus (DXS.AX), with $175m being received this week. A further $25m of proceeds are conditional on regulatory approval. 

2)     AMP has flagged the next phase of the restructuring program, being cost base and balance sheet review. In our view, the ~$800m controllable cost base has several opportunities for greater efficiency.  The balance sheet can be further optimised. 

Whilst AMP has flagged a further $500m buyback, we estimate an additional $1.0-1.2bn of surplus capital sits on the balance sheet and could be used to support additional capital management. Outcomes of both reviews are no later than results in August 2023

3)     AMP has resumed its on-market share buyback post a temporary hiatus ahead of ASX market announcements this week. Importantly, we now see a clear runway into the AGM on 31 March for AMP to aggressively restart the buyback now FY22 Results and AMP/DXS sale are complete. The current $350m buyback has ~$70m to run. We expect AMP will move quickly into the additional $500m buyback.

The AMP share price has fallen from $1.35 to ~$1.00 since FY22 results in February.  In our view, the sell-off is overdone. We see AMP as being firmly committed to returning capital and lowering structural costs.

We can see a clear pathway for AMP share price to return to at least its NTA, which we estimate to be ~$1.40 per share post the DXS sale. Further upside beyond that is possible if AMP can more clearly demonstrate the earnings attached to the platform business, which has A$130bn in FUM (and close to double the size of HUB.AX and NWL.AX platforms business)

Investment View

The AMP restructuring story has contained many bumps along the way. We think the current share price weakness should be bought.  The company is flush with capital, which was announced through an increased buyback program, as well as the dividend which was reinstated at the FY22 Results. 

Whilst we wait for further restructuring initiatives, investors at the current price are receiving a >5% dividend yield.

AMP continues to progress with finding ways to return the A$1.5bn-A$1.6bn excess capital to shareholders. This equates to ~50% of AMP’s current market cap. We expect capital returns will likely continue over FY23-24 given the significant size of the excess capital.

Our investment case on AMP is based on the ongoing turnaround of the Group. The earnings potential of AMP in the FY22 Results was masked by short-term impacts in a small part of the Australian Wealth Management business, which we don’t think will repeat. 

We reiterate our Buy rating.

Specific Disclosure: MST discloses that it may, from time to time, provide paid services to AMP and may be receiving fees for such services.