Is AMP an improving quality company with a strong valuation case?
One new addition in The Montgomery Fund and The Montgomery [Private] Fund is AMP Limited (ASX:AMP), and on its first mention this might seem like a controversial inclusion, but is it really? I cover the in brief the thesis for investing in AMP.
In my guest lectures at Sydney University for the department of Economics and Finance I have featured AMP as a company that would not meet most investor’s definition of quality.
But to disregard it, or write it off, on the basis of its historical performance, would be to potentially miss the future value being created under investors’ noses.
The Australian Eagle Asset Management investment process permits investment in companies undergoing change which signals an improvement in quality that may not be factored into the share price. AMP is an example of a so-called “Improving Quality” company with a strong valuation case because the potential upside is not appreciated, nor factored-in, by the market.
Figure 1. AMP share price 2001-2022
AMP has experienced a tumultuous history, and more recently, several difficult years since the Financial Services Royal Commission burdened it with regulatory fines and triggered constant negative press and management turnover. Understandably, and even predictably, the share price reacted negatively and today it sits at close to two-decade low.
We believe however the share price reflects legacy issues and investor anchoring and bias, and fails to acknowledge the turnaround and improvement in quality now underway.
Indeed, the company’s most recent results confirmed significant progress made by new management since the Royal Commission.
Management is completing the divestment of Collimate Capital (formerly AMP Capital) which will result in a strong surplus capital position. The Advice division’s losses are less than half of those from a year ago, and it remains on target to break even by 2024. Meanwhile, fund outflows hitherto experienced in Wealth Management have slowed, aided by the prized AMP North platform, which continues to attract inflows despite operating under the arguably tarnished “AMP” brand. AMP Bank also remains a steady contributor to Group earnings with recent growth outpacing the rest of the industry.
Elsewhere, the bank’s digital-only offering is gaining traction with new and existing customers.
Our investment thesis begins with our considerations of the downside risk.
With surplus capital of $2.0 billion, after the sale of assets, and a valuation of over $1.5 billion for the AMP Bank – based on book value – AMP’s market capitalisation of about $3.5 billion, suggests shareholders are receiving the +$100 billion multi-platform AMP North business, the Australian and New Zealand advice business and a share of a Chinese asset management and pension company, for free.
Meanwhile, after a few missteps, management appears to be finally delivering upon promised improvements, asset sales and return of capital to shareholders. We believe recent progress provides positive objective evidence for substantial market value upside.
The Montgomery Funds own shares in AMP Limited. This article was prepared 18 October 2022 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 Limited you should seek financial advice.