Morningstar is confident that the embattled wealth group will use the proceeds of its recently announced sale to buy back shares.
AMP last week announced that it is selling its Australian and New Zealand wealth protection and mature businesses to global insurer Resolution Life for a total of $3.45 billion.
The complex deal also includes plans to spin off its New Zealand wealth and advice business via an IPO and a reinsurance agreement with Swiss Re over its NZ wealth protection business, which is anticipated to release $150 million of regulatory capital.
“We think a reflection of the level of integration in its business model is the negative impact the sale of its insurance business will have on its wealth management business and group costs,” Morningstar analyst Chanaka Gunasekera said.
“The sale will unwind distribution arrangements and reduce the product offering in its wealth management business, resulting in a reduction in operating earnings in this business by $80 million to $90 million per year.
Following “alarming levels” of cash outflows from its wealth management business in the third quarter of 2019, couples with the “bargain” sale of life and wealth businesses, Morningstar has reduced its fair value estimate for AMP from $3.40 per share to $2.85 per share, the analyst noted.
“Our fair value estimate assumes that about $1 billion of proceeds from the sale will be used to buy back AMP shares, on the expectation that its surplus capital needs will be reduced following the sale,” Mr Gunasekera said.
However, AMP has not provided any clear indication of what it will do with the proceeds of the sale, which are estimated to be more than $2 billion after costs.
Morningstar believes this will be determined by the royal commission’s final report and the scale of future client remediation and damages claims.
“Despite AMP’s strong market positions in a long-term growth industry, large distribution base offshore growth options and strong track record in cost control, the very damaging royal commission revelations have been an unprecedented disaster,” Mr Gunasekera said.
“AMP’s heritage brand has been trashed, and its long-term strategy is now uncertain.”