Forum Archive Index - January 2004

[<philip@goodreturns.co.nz>]

This was on SMH this morning:

 

Doubts AMP can improve earnings

AMP shares were back under pressure yesterday as a broker raised fresh questions as to whether the financial services group can deliver earnings growth, even after it has completed the laborious amputation of its British arm.

The sombre assessment comes as AMP this week holds its annual convention for 2000 aligned financial planners and is tomorrow expected to release more information about how its Australian distribution force has weathered a torrent of bad news in the past year.

Merrill Lynch yesterday warned that the main distribution division, Australian Financial Services, had the prospect of only modest growth because its "old" or "mature" book of life insurance policies were running off quicker than they were being replaced by sales of "new" or "contemporary" products such as retail investment trusts.

Merrill also forecast AMP would next month report a breathtaking $5.8 billion loss for the year to December 31, 2003, including the expected write-down for the demerger of HHG. The figure would have been worse had not the British sharemarket outperformed in the second half of 2003.

The broker suggests that AMP, at a share price of close to $5, is overvalued by about $1 a share. It suggested the gap was a "reflection of strategic appeal rather than fundamental opinion".

In its report, Merrill noted that 40 per cent of AFS's funds under management were mature product but were higher margin and represented 60 per cent of earnings. Merrill calculates that the mature book was running off or being surrendered at a rate of 8 to 9 per cent a year and this was quite constant at more than $1.5 billion a year.

"Although the run-off may be in line with expectations - all other things being equal - it means that earnings-per-share growth is reliant on capital management initiatives and/or acquisitions.

"Unfortunately, the former is likely constrained by high gearing levels and latter hardly appealing given AMP's track record."

Merrill said the weak growth in the contemporary business of around 3 to 4 per cent a year, if it continued into the new year, may not be enough to offset the fall in the old book.

"It is difficult to envisage earnings growing unless equity markets continue their strong upward trend."

AMP has already claimed that it has overcome brand damage, though Merrill said: "It is possible that the real effect of [customer attrition] will not be evident until 2004."

The report came as AMP weakened 5c to $4.86, possibly also reflecting reduced confidence that National Australia Bank will be able to lob a takeover bid for the group.

Constellation Capital Management's Peter Vann said another issue confronting all companies in wealth management in the coming year was whether they could maintain their margins on retail investment products.

"They are all looking at about 180 to 200 basis point fees from retail investment products. I just really question how long the fees can stay that high," Dr Vann said.

"The big threat to their wealth management propositions is the potential fee pressure if a couple of smaller players come together and undercut them."