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Financial Services

  • Is AMP getting good value for Axa and could ANZ really pay that much for AMP?

    rogermontgomeryinsights
    November 23, 2009

    Corporate Australia has a rich history of overpaying for the right to be big, bigger, the biggest. While size may help fatten the wallet of the steward steering the ship, it is often the case that investors, particularly those late to the party, see their wallets lose weight.

    When ABC Learning bought all those centres and Wesfarmers bought Coles, it was obvious that the prices being paid were much higher than a rational and patient value investor would pay. Justified with promised synergies however, many acquisitions can be made to look good, disguising the real he’s-got-one-so-I-want-one-too motivation.

    Turning to the AMP/Axa deal I should first point out that I am not suggesting either company is in the same boat as ABC Learning. What I will say though is that ultimately a business is worth some multiple of its equity and that multiple must be related to its profitability. Talk surrounds the possibility that Axa could be the recipient of another bid – although none has been forthcoming and with wealth management being a key growth strategy for the banks, there is also talk that ANZ might bid for AMP. The hunter becomes the hunted. Ignoring the cliches, the rumours and share price gyrations, we can value Axa and decide whether we like AMP management’s capital allocation strategy. We can also value AMP and decide, if ANZ make a bid, what we think of them.

    Turning first to Axa; AMP has, with cash and shares, bid about $5.40 per share. Unsurprisingly Axa shareholders want a higher bid. Well of course they do. I would rather receive a few million more for my house too. But Axa’s performance doesn’t justify a higher bid and AMP needs to be prudent.  According to analyst estimates of EPS, Axa will generate a return on equity of about 13 percent over the next two years. With the exception of the 2008 loss, the return on equity for the last ten years has ranged between 6.8% in 1999 and 27% in 2003. Based on the forecast ROE and a payout ratio of between 61% and 67%, Axa’s 2010 equity of $2.58 per share is worth a little more than $3.00 per share. The market believes AMP will bid more and so the shares are trading at $5.84.

    With AMP at $6.35 – up from its lows earlier this year of $3.52 – the price does not reflect the actual value of the business which is between $4.53 and $5.24. Should ANZ bid even more than the already optimistic price, it would reflect a genuine me-too strategy over at ANZ.

    Nothing gets the blood racing more than a takeover and when blood leaves the head for other regions, common sense usually follows.

    By Roger Montgomery, 23 November 2009

    by rogermontgomeryinsights Posted in Financial Services, Insurance.

  • A clear leader emerges among Aussie banks

    rogermontgomeryinsights
    September 9, 2009

    Nothing beats living on an island and nothing beats living on an island and owning the only bank. The cozy banking oligopoly that exists on the island of Australia as well as high switching costs for customers has produced all the benefits associated with a wide competitive advantage.

    Are you going to bother moving if your bank charges you a few cents more for each ATM withdrawal, EFTPOS transaction or EFTPOS cash-out? With 70 million ATM transactions per month, 150 million EFTPOS and EFTPOS cash out transactions per month and 30 million debit card accounts, a few extra cents charged per transaction and account is a valuable revenue generator for banks with very little additional work or cost and virtually no risk of customer loss.

    In the past the banks were all the same from an investors perspective too, but there’s a change in the air. The recent capital raisings have done significant damage to the value of three of the major four banks in Australia.

    When ANZ, NAB and WBC were raising capital to shore up their balance sheets, CBA was raising capital to take advantage of opportunities in a distressed market, and acquired BankWest. It shored up its profitability in the process and now has the highest ROE of all the banks at 19% and based on consensus estimates will return 21% on its equity for the next 2 years. This compares favourably with the ANZ (11%), NAB (12%) and WBC (13%).

    After two decades, a clear leader for investors has emerged in Australian banking.

    By Roger Montgomery, 9 September 2009

    by rogermontgomeryinsights Posted in Financial Services.