Variable View

AMP (AMP) posted a first-half CY17 operating profit of $509 million, just above Ord Minnett’s forecast of $507 million and consensus of $501 million, and declared a 90% franked interim dividend of 14.5cps versus our 14.25c estimate.


Despite announcing a reinsurance deal at a price-earnings ratio premium, AMP shares underperformed after the result on concerns about both a reducing surplus position versus expectations and questions over how the company would deploy more released capital.


We maintain our Accumulate recommendation on AMP due to its undemanding valuation metrics, although we are taking a conservative approach to its capital position and the Australian wealth management business (AWM) due to rises in the division’s variable expenses.


We have cut our target price to $5.80 from $6.05 and lowered our earnings forecasts to reflect the following:


1.     Some concern around AMP AWM (increases in variable expenses);

2.     Incorporating the new reinsurance deal;

3.     Not assuming that upside in AMP Capital Investors earnings will continue;

4.     A sharp slowdown in the bank operation; and

5.     We have factored in what we assume is a loss of $500 million in surplus capital versus our previous assumptions – $300 million from the first reinsurance deal and $200 million from the second – to be cautious. 

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