No quick payback from AMP’s new growth strategy

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AMP is targeting earnings growth by directing capital to higher growth segments of the market, such as advice and self-managed superannuation administration, but the market is yet to be convinced.

The big wealth management company held an investor day last week, at which it outlined a multi-pronged growth strategy. It plans to shift its focus to less capital-intensive businesses and release capital to fund growth.

It will continue to invest in products and platforms but it is looking for an increasing contribution from advice and SMSF services.

It is building a new goals-based advice capability and exploring opportunities to take its advice business to offshore markets.

AMP wants to double the size of its retail bank, AMP Bank, which has a share of about one per cent of the mortgage market.

It plans to improve the productivity of its planners with more investment in technology.

It wants to take its investment management expertise into selected European, North American and Asian markets, particularly China, where it has a partnership with China Life, and Japan, where it has a partnership with MUTB.

China is becoming a big part of the AMP business. The China Life Pension Company, in which AMP has a 19.9 per cent holding, is the biggest pension insurance company in China.

China Life AMP Asset Management, in which AMP has a 14.9 per cent stake, was established in 2013 and is now a top 30 fund manager in China.

AMP chief executive Craig Meller says: “Our strategy continues AMP’s shift from a product and distribution business to a customer-led organisation focused on helping our customers achieve their personal goals.

“In Australia we will continue to lead the wealth management market, changing the sector’s traditional economics by driving greater revenue from advice and self-managed superannuation services. We will help more Australians get more advice, more often through our transformed goals-based operating system.”

In a note to clients headed “Long journey still ahead”, Macquarie Securities says it does not expect the strategy to impact earnings in the short term. It made no change to its price or earnings-per-share targets.

Macquarie left its “neutral” recommendation on AMP unchanged, with a 12-month price target of $5.35. The stock fell three cents on Friday to close at $5.15.

AMP was a $10 stock before the financial crisis but has failed to regain those heights since. After hitting bottom at around $3.80 in June 2012, it climbed to around $6.60 in April 2015 but has been trending down ever since.

Macquarie says: “AMP continues to work towards reducing the capital tied up in the business. However, the investment case is not sufficiently compelling at the current price.”

Macquarie has previously noted that AMP’s cost reduction targets are “ambitious”. For example, it expects to reduce costs by three per cent in the current financial year, despite reporting an increase of three per cent in 2016.

“AMP’s ability to deliver against its 2017 target and maintained cost discipline in future periods is the key to sustaining EPS growth. The cost performance is necessary as ongoing revenue margin pressure will continue to dilute the benefit of markets on group funds under management,” Macquarie says.

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