- AMP Ltd (AMP) has unveiled a plan to offset margin compression in wealth management.
- The target to double AMP bank profits in five years appears a stretch in our view.
- The quality of Capital Investors Chinese partnerships and its real asset expertise is, in our view, still under-rated.
A new plan to offset margin compression in wealth management
We think management did a reasonable job at the AMP investor day to address revenue concerns for the Wealth Management (WM) business.
Firstly, AMP highlighted the relatively solid 5% p.a. revenue growth (as a % of Assets Under Management) achieved by WM over the last five years despite a -2% p.a. headwind from things like margin compression. Management then unveiled a plan to increase WM revenues by 2% p.a. (as a % of Funds Under Management) by focusing on areas like advice and the SMSF segment. This plan basically involves growing advice revenues by holding onto repurchased planner practices, while broadening AMP's SMSF product offering. In our view, if this plan can be executed, the numbers appear to support management's aim to restore WM revenue growth to 5% p.a. through the cycle, potentially with a buffer.
Bank growth target looks a stretch
Management also unveiled a plan to double the profit of AMP Bank over the next five years. This plan appears to heavily rely on achieving significant above market growth by leveraging the AMP adviser network, e.g. only 25% of AMP's advisers currently originate debt with AMP. While acknowledging the AMP Bank has significant room to grow (approx. 1% mortgage market share) and will benefit from investment in scale infrastructure, we view this target as a stretch given the likelihood of a slowing housing market and the conservative risk settings of the AMP Bank.
We think Capital Investors is under-rated
We continue to believe the long-term growth potential of Capital Investors (CI), AMP's fund management business, is under-rated. As highlighted, the China Life Pension Company (approx: 20% stake) is now the largest pension company in China and AMP China Life Asset Management (approx: 15% stake) is the fastest growing fund manager in China (A$22bn in Funds Under Management). AMP is now targeting A$50m in earnings from China in five years, and while growth remains long-dated, it is potentially (in our view) exponential.
In addition, CI retains a strong unique skill set in real asset investments, a growth area. CI's real asset Assets Under Management grew strongly from A$23bn in 2012 to A$36bn in FY16.
In our view AMP Ltd (AMP) remains oversold. We feel it has a very low hurdle level to re-rate from here. We think this will happen as the market becomes more comfortable that Wealth Protection earnings have been fully rebased and the Wealth Management performance improves post recent volatility.
We make no changes to our forecast and share price target, and we maintain our Add recommendation.
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