Becoming more flexible

A combination of volatile markets, structural change within the wealth management industry and perhaps the distraction of the AXA Asia Pacific takeover situation has overly complicated the view of AMP, driving what is in our view excessive share price weakness. When the dust settles on these issues, investors will still own a business with a strong market position in a growth industry. AMP has substantial operating leverage to rising markets, suggesting that investors with a contrary approach should be looking at this stock now.

“The changes to the wealth management industry are providing opportunities for businesses such as AMP to leverage their expertise”

AMP’s first half result for 2010 was below consensus estimates, but within the result was generally good news about progress in several important areas. In particular, having moved very early on the prospective changes to the superannuation and wealth management industries, AMP now finds it is picking up solid business in its low-cost, commission-free Flexible Super product since its launch in May.

A second major change for AMP (and the industry) has been the shift to fee-for-service as a replacement for the commission based business that previously prevailed. AMP’s entire planner network has successfully transitioned to this new structure and simultaneously launched a product range to compliment the potentially broader customer base. AMP is expecting to have a bigger presence in the IFA market as a consequence.

Turning to the charts, AMP touched a recent low of $4.88 on August 23. The speed of the decline has resulted in the RSI to dip into way oversold levels. The decline in volume is indicative of the move to the downside to be exhausted. We would anticipate buyers to emerge in the near term. This should result in a period of consolidation / base building over the coming weeks / months.

The result

AMP’s underlying profit of $383 million was 4.4% ahead of the prior period. This is the basis on which the company determines its dividend payment as it removes some of the investment volatility to give a realistic look at the actual profitability of the company. AMP increased its interim dividend to 15 cents per share and franked it to 60%.

Net profit attributable to shareholders was $425 million, an increase of 17.4% on last year.

Among the business units, AMP Financial Services (AFS) increased earnings by 5% to $323 million as assets under management grew and higher fees resulted. AFS also delivered a good cost outcome with costs falling slightly resulting in a cost to income ratio of 33.6% compared to 35% in the prior period.

AFS has launched its AMP Flexible Super product range in May, and already boasts $260 million in cashflow with assets under management of $330 million. AMP has acted strongly and quickly ahead of the regulatory changes to the industry – a move which could benefit the company in the medium term. We are particularly encouraged by the acceptance of the AMP planner workforce which appears to have embraced the changes rather than resist them. A more productive workforce will emerge and not only enhance AMP’s leading industry position but also drive its products into new market segments.

AFS planner numbers remained basically flat across the period at 2,105 leaving the company as the largest in the industry.

Within AFS, AMP’s Contemporary Wealth Management division includes financial planning, superannuation, pensions and banking. Operating earnings here increased 16% to $150 million as a result of higher investment related revenue of $57 million offset by $23 million of higher variable costs. Again, AMP managed its costs well leading to a lower cost-to-income ratio of 41.7%.

AMP’s Contemporary Wealth Protection division comprises its individual and group risk products, such as income protection. Operating earnings here fell 12% to $73 million. The culprit was an increase in income protection claims, which is representative of the current industry environment rather than any weakness peculiar to AMP.

Selling insurance through superannuation products continues to be an attractive source of business for AMP planners. More than half of in-force and 70% of new individual business is written within a superannuation contract. AMP believes it can grow overall market share by lifting the proportion of superannuation customers who have adequate insurance cover, as well as only writing profitable business. The expanding distribution through independent financial advisers and other channels gives AMP an even greater opportunity to lift this business volume.

AMP’s market share of assets under management has remained relatively steady in the period. In the $243.5 billion superannuation market, AMP has 17.4% share placing it second as at March 2010. AMP has 11.2% of the $105.6 billion retirement income market and 12.2% of the overall $493.6 billion retail managed funds market.

As at 30 June 2010, AMP Capital Investors (AMPCI) managed $95 billion. This business is a diversified investment management business and is expanding towards external sources for growth in assets under management (AUM). AMP has expanded its presence in Asia as a source of new clients and now manages funds for Japanese, Chinese and other Asian clients. About 40% of AUM is now externally sourced.

AMPCI generated $48 million of underlying operating profit during the half year period.

From a broader perspective, the break below support at $5.66 resulted in the continued decline lower. The bearish moving average cross and negatively crossed MACD is suggestive of momentum to favour the downside. Support is located at the July 2009 low of $4.55.

Outlook

AMP’s chief executive officer Craig Dunn said the global economic outlook is causing on-going market volatility, subduing investor confidence. The local and Asian markets remain robust providing the company with some confidence for the future.

The changes to the wealth management industry are providing opportunities for businesses such as AMP to leverage their expertise. But this is requiring a strong internal response to reposition the products and service for the changes. AMP has clearly achieved this and is likely to be a leading competitor under the new environment.

The market is awaiting the outcome of the ACCC’s deliberations on the National Bank of Australia’s bid for AXA Asia Pacific. AMP remains on the sidelines for now. The situation appears to have a straightforward future for AMP. If NAB wins AXA AP, AMP will simply continue on as a leading competitor in the financial services industry with an attractive growth profile. If NAB misses out, the market will immediately look for a response from AMP for its intentions on whether it will launch a renewed bid for AXA AP.

Either way, we continue to like the prospects for AMP and will retain it in the Fat Prophets Portfolio.