Back in the 1960s, AMP Limited (ASX:AMP) built the tallest building in Australia, with magnificent views over Sydney harbour. It was a symbol of the firm’s dominant place within the local financial sector. Fast forward 60 years, and AMP is a shadow of its former self, and its share price has suffered accordingly – down 91 per cent since listing in 1998. Subsequent to its fall from grace, Australian Eagle identified certain factors which gave the company the chance to evolve and if successful, continue to play a big part in the financial services industry.
As one of the oldest and most reliable pillars of the financial system, many Australians held AMP in high regard, with numerous individuals and institutions using their products and services in life insurance, superannuation, financial advice, funds management and banking. That well-regarded reputation was decimated by the financial services and banking Royal Commission in 2018, which accused AMP and the broader financial industry of unethical and negligent behaviour towards customers.
The explosive findings resulted in significant client remediation costs, the substantial outflow of client funds and constant negative media attention for AMP. While the stock price fell from over $5.00 per share to about $1.50, the company immediately went about salvaging their reputation and formulated a turnaround plan, focusing on replacing management, selling the life insurance business and raising additional equity to stabilise the business. However, things deteriorated as the promotion of an employee in AMP Capital was leaked to the media, resulting in controversy and accelerated fund outflows.
During this turbulent time for the company’s shares, the Australian Eagle team concluded the downside risk was limited and upside potential evident. The downside was protected by a large portion of the market capitalisation represented by surplus capital, and valuable divisions displaying resilient earnings. The change we saw involved not only the realisation of the value within AMP Capital via asset sales but also the subsequent return of capital. This provided confidence that steps were being taken that would close the gap between price and value. The portfolio weight was further increased when management commenced delivering on cost-cutting measures within the loss-making Advice business. With evidence of growth in already-profitable business units, confidence was growing that substantial latent value would ultimately be reflected in the share price and subsequently AMP’s share price was one of the best market performers during a difficult 2022 calendar year.
The 2022 financial report released in February this year, however, revealed a larger-than-expected deterioration in revenue and a slower-than-expected pace of cost-cutting. When combined with management apparently softening their resolve to achieve pre-announced targets, we concluded reduced earnings and significant delays to earnings growth expectations are likely.
In the 18-year history of Australian Eagle, it is rare for a company’s quality to be reassessed adversely after momentum for positive change and improvement has already been demonstrated. The Fund’s investment process focuses on the characteristics of quality and valuation supporting the share price of a company. While AMP scraped into the bottom of our quality ratings assessment upon the commencement of our position, the company displayed encouraging progress towards improving its overall quality.
Alongside positive change occurring in the business, our conviction, and consequently the size of the position, was based on the downside protection offered by the discount to book value, which in turn was supported by surplus capital. This downside protection, which gives us time to reassess our position, is further reinforced by the confirmation of at least five cents per share in dividends this year, and the recently approved availability for an additional $500 million share buyback at the Annual General Meeting in March.
Most recently, the company’s first quarter update in April showed significant improvement in cashflows for its Australian Wealth Management division along with continued strong inflows for its North Platform from independent financial advisers. Although operations are now broadly heading in the right direction, the Australian Eagle investment team are still carefully monitoring the situation and will be adjusting the portfolio position accordingly on any arrival of new material information or alternative opportunity for the capital.
The Montgomery Funds own shares in AMP. This article was prepared 09 May 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade AMP you should seek financial advice.