It’s the rare chief executive who’s comfortable presiding over a shrinking empire, but Alexis George’s mandate when she took the job at AMP was to simplify the 173-year-old company.
Over the past 16 months, George has delivered almost $2.5 billion in asset sales, which would have been a massive drain on her attention from the core business, even for such an experienced executive. George has worked for the past three decades in the finance sector from Bankers Trust, ING to ANZ, before becoming AMP’s chief executive.
With the start of a new year, George now has the clear air to focus on growing AMP’s remaining businesses, including wealth management and banking, but that will be much harder given the agitation she’s facing from multiple institutional investors, who either want a further break-up of the company, or a doubling in the return of capital.
AMP’s board and management has committed to returning $1.1 billion to shareholders by the end of June next year.
In 2022, AMP’s share price rose 25 per cent, compared with a decline in 6 per cent across the broader ASX200 index. The outperformance is to be applauded, but it’s a small salve for many of AMP’s long-suffering retail investors, who since the company’s listing in 1998 have seen the destruction of value by a succession of chief executives and boards.
Since 1998, the ASX200 returned 126.85 per cent compared to the 140 per cent in lost value that AMP retail investors are sitting on.
AMP will report its full-year result on February 16, and investors will be looking for an improvement. At its half-year results, AMP reported a decline in earnings across most of its divisions compared with the same period a year earlier.
Neil Margolis, the founder of institutional investor Merlon Capital Partners, is keen for AMP to return more capital than the $1.1 billion planned. He notes that as of June 2022, the company said it had $1.4 billion of surplus capital, with $710 million in capital that has been retained as a ‘board buffer’.
“This board buffer, in our opinion, is unnecessary. If you look at what’s left, only the bank requires material capital and AMP already has more capital in its bank than the other listed commercial banks, relative to the size and risk of its loan book,” he said.
“The cost of carrying that surplus capital, including the board buffer, is much more onerous for shareholders when inflation is running at 7 per cent and their yield on cash is likely to be much lower than this.”
“They should be returning much more than the $1.1 billion planned. It looks to us that they have north of $2 billion in surplus capital.”
AMP has argued that the board buffer ensures that the company remains well-capitalised to withstand potential operational, macroeconomic, regulatory or product-related risks. As well, the company has argued its plan to grow the banking division at a rate almost double that of the broader banking system, will require more capital.
In November, Fred Woollard, co-founder of Samuel Terry Asset Management, gave a speech at the Sohn Hearts & Minds investor conference, advocating for the entire break-up of AMP, even after the significant purge of assets of the past two years.
Since 2021, AMP has sold almost $2.5 billion worth of businesses in at least five transactions, as parts of the AMP Capital division were broken up and sold, as well as the remaining equity interest in its life insurance arm.
Woollard has argued that despite the asset sales by AMP in the past few years, more could be done. He says that the remaining divisions of the company – the bank, advice, master trust, platforms and wealth management, are worth substantially more than the company’s market capitalisation of $4 billion.
“AMP has a collection of unrelated assets, with few synergies between them. For starters, AMP has, or will soon have, surplus capital of over $2 billion. This could be distributed to shareholders or used to make acquisitions. It owns a profitable bank that has net assets of over $1.2 billion. Based on recent sales of other mid-size banks, it could be sold for at least that, possibly more.”
“AMP also owns a profitable wealth management business in New Zealand, which is the market leader, highly profitable and completely separate from the Australian businesses. That could be sold for around $400 million,” he said.
“AMP’s superannuation business has suffered from bad publicity and competition from industry funds, but it still makes around $100 million profit managing over $50 billion of assets.” “Superannuation is a growth industry in Australia, and one in which size matters. If put up for sale, AMP’s superannuation business would be keenly sought by competitors and might realise a billion dollars.”
Woollard also argues AMP’s platform business could be sold for about $1 billion.
He and Margolis join other institutional investors, such as Allan Gray and Australia Eagle Asset Management, that have been pushing for AMP to lift its capital return above $1.1 billion.
Companies with large amounts of capital or break-up potential have become targets such as Boral, which was partially acquired by billionaire Kerry Stokes’ Seven Group. It took a 70 per cent stake in the company, undertook a string of assets sales tallying close to $4 billion, and returned $3 billion in capital.
“AMP’s mix of assets do not belong together. There are no synergies between an Australian bank, a New Zealand wealth manager and a minority stake in a Chinese pension firm. Keeping these assets together is costing AMP shareholders significant money. Shrinking and simplifying AMP should not be rushed; it should be done in an orderly and considered manner,” Woollard said in his Sohn talk.
Despite the growing pressure from institutional investors, AMP’s boss George maintains that management will make decisions “in the best interests of all shareholders, AMP and our customers”.
“We regularly engage with our institutional and retail shareholders to keep them informed of our strategic progress, how we’re managing their capital, and to listen to their views,” she said.
“We are pleased to be able to deliver on our commitment of capital returns to our shareholders, while also ensuring we maintain an adequate capital surplus to support AMP’s strategy, including investing in organic growth in our bank and platforms businesses and paying down debt to further strengthen our balance sheet.”
George said AMP continually assesses its capital management approach, and is focused on delivering long-term value, as well progressing the company’s transformation.
Woollard and Margolis have both been pleased with the board and management renewal of the past three years. Woollard describes George as a “first-class CEO”. A new chief financial officer in Peter Fredricson, begins in January.
It has been speculated that AMP might want to buy the BT Panorama platform Westpac, with asking prices suggested. “Our preference is for capital return unless they acquire this platform at a very attractive price,” says Merlon’s Margolis.
Meanwhile, Woollard doesn’t want AMP wasting money on poor acquisitions.
“AMP’s share price is about 60 per cent of fair value. In effect, if AMP uses a dollar to make an acquisition, then AMP magically turns a dollar into sixty cents. If AMP returns that dollar to shareholders, it turns a dollar (valued by the stock market at sixty cents) into a hundred cents in the shareholders’ pocket.”
Margolis and Woollard both argue the value of AMP’s shares could be closer to $2, compared to recent levels around $1.35.
“We see the low case valuation close to $2, and that’s just adding up the surplus capital, the bank, the platforms and New Zealand wealth management, as well as assuming the corporate costs and losses in the advisor servicing business can be reduced,” Margolis said.
“Of course, there’s more upside to that if the bank can improve its returns, the platform and master trust businesses can stem the outflow sooner and the corporate costs can be substantially reduced.”
On November 14, George presented to the UBS Australasia Conference. Three days later, UBS’ analysts put out a note maintaining a sell on the company.
“Capital returns will likely defend the stock for the time being. Thereafter, we remain concerned by the mid-term outlook for the continuing businesses. AMP continues to face fundamental challenges across both banking and wealth management segments and the future shape of the group is unclear.”
Pressure from institutional investors can create a bias towards action. How George deals with that pressure, while convincing investors she recognises their concerns and is dealing with them, will be her biggest test yet.
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