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AMP

AMP Ltd - Poor HY20 Result But Returning Capital To Shareholders A Surprise

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

AMP Ltd (ASX: AMP) is financial services company in Australia and New Zealand. AMP specialises in providing personal and business financial services that include superannuation and investment products, insurance, financial advice and a range of banking products such as home loans and savings accounts. Its market capitalisation is $A4.7 billion.

 

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What was AMP’s HY20 result?

AMP reported HY20 underlying profit of A$149 million, compared with A$256 million for HY19, a fall of 42%. This outcome is due to poor performance across all of AMP’s business units. AMP will not pay a dividend in respect of HY20 earnings.

Operating earnings for the Australian wealth management business fell from $103 million in HY19 to $59 million in HY20, or by 42.7%. Operating earnings were impacted by lower investment related revenue due to weaker investment markets, costs associated with implementing the Protecting Your Super legislation and product fee reductions. Operating earnings for AMP Bank fell from $71 million in HY19 to $50 million in HY20, or by 29.6%. This fall mainly reflects AMP Bank’s credit loss provision of A$24 million (post tax) for potential mortgage defaults related to COVID-19, given uncertainty in the economic outlook. Operating earnings for AMP Capital fell from $120 million in HY19 to $72 million in HY20, or by 40%. This drop was due to lower fee income and lower asset valuations. Finally, New Zealand wealth management fell from $22 million in HY19 to $18 million in HY20, or by 18%. This outcome is primarily due to the closure of legacy products in 2H19 and the conclusion of cost sharing agreements with AMP Life.

AMP remains on track to complete its client remediation program in 2021 with 80% of the program expected to be complete by the end of FY20. Total program spend to date is A$328 million with A$64 million paid in 1H20. An additional provision of A$15 million in 1H20 primarily relates to recognition of additional lost earnings. Overall, remediation costs remain broadly in line with original estimate provided in November 2018.

What is AMP doing in respect of capital management?

AMP remains well-capitalised. The capital framework has been reset following the sale of AMP Life, reflecting lower regulatory capital requirements of the retained businesses. Surplus capital above target capital requirements was A$1.4 billion at 30 June 2020.

AMP announced today that it will acquire MUTB’s 15 per cent shareholding in AMP Capital for around A$400 million. The transaction is expected to complete in the September quarter 2020. Following completion of the repurchase, pro forma surplus capital above target capital requirements is expected to be approximately A$1.0 billion.

AMP also announced a series of capital management initiatives to return up to A$544 million to shareholders. These include A$344 million via a special dividend of 10 cents per share, fully franked and up to A$200 million via an on-market share buy-back during the course of the next 12 months, subject to market conditions. The ex-dividend date for the 2020 special dividend is 18 September 2020.

What is the market reaction?

The market’s reaction to AMP’s announcement today is positive. AMP is up around 10% and is trading at A$1.50 (13 August 2020). This positive reaction probably reflects the announcement today to return capital to shareholders rather than the market reacting to AMP’s poor profit result. AMP trades on a forward P/E ratio in the high twenties and has an annual dividend yield of 0% (excluding the payment of the special dividend mentioned above).


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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