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Morgan Stanley says AMP Limited (ASX:AMP) is a Buy

With all the bad news facing AMP Limited (ASX: AMP), it would seem to be a no brainer to steer clear of the wealth management group right now.

After all there’s been the fallout from the Royal Commission, board and executive changes, two class action lawsuits and the threat of more profit downgrades from the company.

All these negative factors pushed AMP to a fresh-year low of $3.73 a day after the group’s annual general meeting on May 10.

But some market watchers are saying now is good time to take a fresh look at the stock, saying concerns have been overplayed.

Broker Morgan Stanley is of this view. It says AMP offers deep value, with the stock trading at levels not seen since 2002/2003. 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. 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,” it said in a report.

“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.”

Morgan Stanley adds that the circa 30% fall in AMP’s share price since the resignation of Chief Executive Officer (CEO), Craig Meller, on March 26 implies around a 75% in wealth earnings, but notes that its wealth divisions remain largely unaffected.

According to Reuters estimates, AMP is also looking pretty cheap at current levels. It is trading on a P/E of 13.5 times, compared to Perpetual Limited (ASX: PPT) on 13.7 times and Magellan Financial Group Ltd (ASX: MFG) on 25.4 times. The sector P/E is 19.6 times.

Morgan Stanley concedes, however that AMP Limited is not without risks, with a client exodus, regulatory intervention on grandfathered products and a prolonged CEO transition some of the factors that could present negative surprises.

The broker cut its target price to $4.50 from $5.75 due to earnings downgrades to its base case scenario, a re-working of its bull and bear cases and an increase in cost of equity to 11.5% (from 10.5%) to reflect heightened business risks.

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Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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