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AMP share price, Shaw analysts: ‘The outlook is for worse to come’

We examine Shaw’s view of AMP Limited before the wealth manager reports its first-half results, this Thursday.

AMP Source: Bloomberg

AMP share price: a road of declining profits

In the wake of the 2019 Hayne Royal Commission – financial services heavyweight AMP Limited (AMP) – has proven to be a particularly divisive stock. Indeed, although the big four banks walked away from the royal commission mostly unscathed, AMP has seen its core business model – wealth management – significantly disrupted.

Even so, some have argued that at current price levels AMP represents value; on ther other hand, others have argued that the business, in a state of decline, has left the stock fairly valued.

Regardless of such academic distinctions, since early 2018 the AMP share price has precipitously declined, falling from over $5 per share to around $1.40 today – representing a fall of over 70%.

To give further context to this decline, one need only compare to AMP’s expected H1 FY20 earnings to its H1 FY18 earnings.

Specifically, as guided in a recent trading update, for the first-half, AMP expects to report total operating earnings of $195 million – set to be primarily comprised of $60 million from its local wealth management arm, $70 million from AMP Capital, and $50 million from AMP.

By comparison, in fiscal 2018 AMP reported total operating earnings of $503 million – made up primarily of its Australian wealth management Arm, contributing $204 million in operating earnings; AMP Capital contributed $94 million; AMP Bank contributed $78 million, and Australian Mature – the firm’s life insurance arm – contributed $70 million.

Such a comparison goes a way to potentially explain AMP’s share price decline over the last half decade. Of course, investing is not a backwards looking enterprise, but a forwards looking one, and thus the relevant question remains what is the outlook for AMP?

Addressing such a question, analysts from Shaw and Partners believe it is a dour one, namely arguing that ‘The outlook is for worse to come.’ Shaw analysts go on to say that:

‘While these losses may well disappear one day, they can be expected to be replaced by even lower revenue margins in AWM and potentially declining assets under management for both AWM and AMP Capital as net cash outflows possibly worsen.’

In line with such a view, Shaw predicts further potential downside for AMP investors at current price levels – assigning the stock a Sell rating and valuing it at $1.20 per share.

Other bits and pieces

Elsewhere, though AMP provided H1 profit guidance as part of its recent market update, they have yet to provide dividend guidance, noting that its current capital management strategy would be expanded upon as part of Thursday’s half-year results.

Shaw analysts, in line with their negative view on the stock, said:

‘It’s expected that there won’t be anything material left for shareholders after paying for that strategy and the other mistakes of the past.’

Further out, Shaw analysts noted that asset quality may impact future dividends or may even necessitate a capital raise down the line.

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