The fallout from the royal commission, board and executive changes, two class actions and the threat of more bad news coming out of the company has driven AMP’s stock to levels not seen since 2002.
But Morgan Stanley's Daniel Toohey says these risks have been overplayed and progress to address compliance issues unappreciated.
The broker also says that market fears of a mass client and planner exodus alongside a dramatic fee squeeze seem overdone.
“In our view, investors cannot ignore the opportunity presented and now is the time to build a position. We have for a long time believed that the inherent value in AMP is not recognised by the market and we have highlighted tail risks of AMP becoming a value trap,: Toohey said in a report.
“These tail risks reflected potential adverse outcomes arising from the lack of Board cohesion, potential Chair and CEO fallout, challenges to executing on unlocking value in the existing structure and potential regulatory risks undermining its reputation in financial advice.
“Fair to say, in quick succession all these risks have come home to roost. In the 15 years we have been analysing AMP, this is unprecedented."
Other businesses unaffected
The analyst added that the 30 per cent fall in AMP’s share price since the resignation of chief executive, Craig Meller, on March 26 implies a 75 per cent fall in wealth earnings, but noted that its other businesses remain largely unaffected.
Consequently, he concluded there was likely to be little "negative spillover" from wealth into AMP's other areas, other than AMP Capital.
While the fortunes of AMP's wealth management business capture a lot of attention, he went on to say, this accounts for just 38 per cent of operating earnings.
Outside of this, he argues, the portfolio is fairly diverse across Banking, AMP Capital, Mature and New Zealand
Toohey is convinced franchise terms make it tough for planners to leave. So, as he sees it self-employed planners are likely to go into damage control, reassuring clients and minimising leakage.
Hard to leave
Meanwhile, switching costs for competitively tendered corporate super mandates are high, with pricing and terms clear.
“These clients are less likely to be reactionary in their decisions, in our view. Nonetheless, we forecast $1.5 billion a year wealth outflows and 4.5 per cent fee squeeze for three years."
Toohey concedes that AMP is not without risks as a client exodus, regulatory intervention on grandfathered products and a prolonged chief executive transition could “adversely surprise”.
“We recognize AMP arguably has no chief exeecutive or strategy to unlock value, but take comfort that the incoming chairman (David Murray) and interim executive chairman (Mike Wilkins) are steering a pathway.Our call in large part reflects the value of incumbent assets, not growth.”
While the status quo is likely, Toohey reckons the scenario of changes to vertical integration brings the portfolio construct into the spotlight.
Ironically, he went on to say, AMP's $200 million digital advice, open API and compliant-by-design tech solutions largely address the royal commission issues. delivering compliant advice by design.
“In the absence of a similar investment by peers, this tech potentially could emerge as a core piece of infrastructure re-shaping the wealth value chain in a tougher regulatory regime."
Morgan Stanley values AMP at $4.85 a share. At close of trade on Tuesday, the wealth manager’s shares were up 1.52 per cent to $4.02.