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Morgans says AMP Limited shares are a “Buy”

Morgans has retained its “Add” rating on beleaguered wealth management group, AMP Limited (ASX: AMP), saying the company’s announcement on Friday in the wake of admissions to the banking Royal Commission represents “decisive company action”.

On Friday, AMP announced a number of initiatives to accelerate change across the group, including the appointment of former Insurance Australia Group Ltd (ASX: IAG) CEO Mike Wilkins as interim CEO, after it admitted to the Royal Commission that it had misled ASIC at least 20 times over charging customers fees for no service.

“We see the announcement as decisive company action given the large negative publicity and adverse reputational impacts caused by the Royal Commission. Mike Wilkins, former IAG CEO, in our view, will be seen as a safe pair of hands as interim CEO given he is well regarded by the market”, Morgans said in a research note.

The broker added that while it was hard not to see long-term value in AMP shares, “execution by a new management team will be key to realising value.”

According to Reuters estimates, AMP is trading on a P/E of 14.8 times compared to Magellan Financial Group Ltd’s (ASX: MFG) 24.6 times and Perpetual Limited’s (ASX: PPT) 13.17 times. The sector is trading on 20.13 times.

Morgans also lowered its target price on AMP to $4.94 from $5.82 with the new target representing a 15% discount to its valuation given the growing regulatory risks facing the wealth management group.

“Regulatory risks for AMP have clearly grown this week in our view…there remains large uncertainty attached to the Royal Commission and how negative its recommendations (released in 2019) will be,” it said.

“At the very least, AMP compliance costs will rise going forward, in our view, with other risks like potential additional customer redress and changes to vertical integration, etc, hard to fully dismiss.”

Following the Royal Commission revelations, AMP is facing a potential class action from global law firm, Quinn Emanuel Urquhart & Sullivan and pressure is building for the group’s chairman to resign.

Morgans said that it did not rule out Board changes going forward but that it didn’t expect the costs associated with the company’s outlined reviews to be overly material.

The broker did not make changes to its forecasts and said it would review its numbers following AMP’s forthcoming AGM on May 10, 2018.

As at lunchtime Monday, AMP shares were down 0.9% to $4.26. Meanwhile, shares in Australia and New Zealand Banking Group (ASX: ANZ) gained 0.468% to $26.85, Commonwealth Bank of Australia  (ASX: CBA) was up 0.6% to $72.49, National Australia Bank Ltd  (ASX: NAB) was 0.6% higher to $28.55 and Westpac Banking Corp  (ASX: WBC) gained 0.7% to $28.80.

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Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited and National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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