Reporting Season
During every reporting season, there are many companies whose results aren’t looked at closely by investors as their businesses are relatively consistent with few surprises, earlier this week Transurban and SCA Property firmly fell into this camp.
Conversely, AMP first-half results released on Thursday morning has been one of the most hotly anticipated results that I have seen for several reporting seasons; with new CEO De Ferrari revealing his strategy to turn around the beleaguered 170-year-old financial services company and the size of a speculated capital raising.
The three key takeaways from today
Unlike most ASX-listed companies, the headline profit numbers in AMP’s half-year report which saw underlying profit down -38% to $309 million would not have been a focus area for investors on Thursday morning. AMP has had a torrid twelve months and in July told investors not to expect a dividend. Three major points to come out of the AMP results were:
1) Life insurance sale back on
In July, AMP revealed the sale of its Australasian life insurance business for $3.3 billion was unlikely to proceed given objections from New Zealand’s RBNZ which wanted to ring-fence some assets exclusively for policyholders in New Zealand. This morning AMP announced that the sale would be going ahead, albeit at a lower price of $2.5 billion in cash (or net $1.2 billion after debt). Additionally, the new deal has some unattractive conditions that could see some of the $30 billion AMP Capital manages on behalf of AMP Life go to external fund managers, as well as the new owner entitled to 100% of AMP Life’s mature book. As AMP controversially conducted a closed briefing and then declined to take questions after the presentation, it is not clear whether the RBNZ’s concerns have been addressed.
2) Outflows continue
A key financial metric in the AMP result for most investors was the quantum of fund outflows stemming from the revelations of the Royal Commission. AMP revealed cash outflows of $3.1 billion, a similar amount to the outflows seen in the second half of 2018. The market was fearing that this number would accelerate throughout 2019, an unpleasant situation for a business with relatively fixed costs.
3) Capital raising
AMP announced an underwritten capital raising of $650 million at a fixed price of $1.50, which will increase AMP’s shares outstanding by close to 15%. Proceeds from this capital raising are being directed to help fund AMP’s cost out program and help fund the exercise of buyer of last resort (BOLR) contracts held by many AMP-tied planning firms. These BOLR contracts were put in place historically to entice financial advisers to the AMP network, recommend AMP funds, with the adviser having the option to sell their practice back to AMP for a price often equivalent to four times historical revenue. AMP’s have estimated that this is likely to cost between $300-$400 million which is much less than analyst estimates.
‘Reinventing’ Wealth Management
The new strategy revealed to “Reinvent Wealth Management in Australia” looks similar to the previous CEO’s 2017 growth strategy; namely exit low growth capital intensive businesses and reinvest in the higher growth AMP Capital. In wealth management the strategy appears to be to cut the number of AMP advisers (currently at 2,412), renegotiate the BOLR contracts and migrate a large portion of customers onto computer-driven or robo financial advice. On the surface this would appear to be challenging to execute, while minimising outflows from clients.
The next 12 months for AMP
While there is a long-term demand for financial advice and the management of superannuation account balances; at the core of financial advice and funds management is trust. The Royal Commission has eroded trust in AMP, piecing many of the veils around AMP’s vertically integrated model. Maintaining the status quo for AMP is clearly not an option for the new CEO, but this is likely to be one of the more complex corporate restructures in the history of Australian financial services. Reinventing AMP will probably take longer and be more expensive than management currently estimates, as such we would prefer to watch AMP being “reinvented” from the sidelines.