AMP's fair value cut amid bank probe 'disaster'
Morningstar has downgraded its fair value estimate for AMP, saying the revelations of the banking royal commission have been an "unprecedented disaster" for the once venerable wealth management giant.
AMP may face more scrutiny from the royal commission next week
Morningstar has downgraded its fair value estimate for AMP, saying the revelations of the banking royal commission have been an "unprecedented disaster" for the once venerable wealth management giant.
The fair value estimate for the narrow-moat rated AMP (ASX: AMP) now stands at $3.60 per share, down from $3.90, says analyst Chanaka Gunasekera. At 2pm today, AMP was trading at $3.51.
The downgrade coincides with a push by new chairman David Murray to crack down on governance following damning evidence at the banking royal commission of customers being charged for services they never received.
These revelations forced the resignation of former CEO Craig Meller and former chairman Catherine Brenner.
"The very damaging royal commission revelations have been an unprecedented disaster," says Morningstar's Gunasekera. "AMP’s heritage brand has been trashed and its long-term strategy is now uncertain.
"A range of remedial actions have been announced and have been or will be implemented as soon as practicable. Execution is always key to long-term success, and so far, we think the jury is out on whether new management can deliver."
Gunasekera has reduced earnings forecasts for AMP as it faces steep compliance costs and a wave of class actions.
"Our view is AMP will be in a period of transition for the next few years and will suffer from higher compliance costs, and lower growth as it employs new senior management," he says.
Forecast 2018 underlying net profit after tax has fallen from $950 million to $940 million.
Higher NPAT growth from the bank and AMP Capital is partly offset by an unexpected negative experience and capitalised losses in the chronically underperforming wealth protection division, Gunasekera says.
The FY2018 dividend guidance has also been downgraded from 24.5 cents to 23 cents.
AMP is tipped to lose customers because of the reputational damage and may face a damages bill of up to $150 million - which surpasses the $132.5 million legal bill insurer QBE (ASX: QBE) faced late last year after a profit downgrade lopped $5 billion off its market value.
And the trouble for AMP is set to intensify next week when the royal commission shifts its focus to superannuation.
"Given the previous round of hearings, we expect the next round could focus on charging members fees for no service, and matters uncovered by the recent Productivity Commission report like the underperformance of some super funds," Gunasekera says.
"We expect more clients will be switched to lower-margin investment products following the royal commission."
Another key risk is that AMP will have to break up its vertically integrated model by separating its advice business from its product manufacturing and platform business, Gunasekera says, although he doubts this will occur.
On the bullish side, Gunasekera says AMP has the potential to benefit from an increase in the compulsory superannuation guarantee from 9.5 to 10 per cent in July 2021, and to 12 per cent in 2025.
Australia's ageing population may also be a bonus as more people seek financial advice.
More from Morningstar
• Make better investment decisions with Morningstar Premium | Free 4-week trial
Lex Hall is a Morningstar content editor, based in Sydney.
© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.
