The AMP Limited (ASX: AMP) share price jumped 3.9% to $2.40 this morning – making it the third-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index after the Afterpay Touch Group Ltd (ASX: APT) share price and Appen Ltd (ASX: APX) share price.
Our largest wealth management company is one of the best-performing stocks on our market today as management responds to damning criticisms from its largest shareholders over the sale of its insurance business.
AMP released a presentation to justify the financial logic of selling the AMP Life division to Resolution Life for $3.3 billion.
Management has been under intense pressure as a number of institutional shareholders blasted the company in the media for selling the business too cheaply and at the bottom of the cycle.
These shareholders were infuriated as they believed AMP was selling the asset at a very large discount to previous deals in the sector and that the price tag reflected a tiny 6.3 times historic earnings, according to the Australian Financial Review.
These aggrieved fundies believe shareholders would be better off if AMP kept the business or looked to divest it through a spin-off into a separate ASX listed entity.
AMP refutes this and points out that the transaction actually represents an 11-times multiple to earnings and that doing a spin-off would incur significant costs.
The board of the disgraced wealth manager added that the sale would leave the group with net cash and equivalents (part of the $3.3 billion is to be paid in non-cash assets like preference shares) of nearly $1.1 billion while AMP's minimum regulatory capital requirements would largely stay the same.
The response seems to have won over investors for now, but I don't think the bun fight is over. The issue is that the explanation could reinforce criticism that AMP is indeed selling AMP Life at the bottom of the cycle.
The sales multiple of 6.3 times or 11 times are both technically correct. The lower multiple is based on what AMP made in the past while the 11 times is based on management's view of what the business will make in the future.
In other words, AMP is expecting a further sharp deterioration in the performance of AMP Life. I don't believe this is the consensus view of analysts although who can argue with AMP as its executives are the best placed to judge how the business is performing.
But I will say management's assumption to back its decision looks a little too convenient. The operating earnings from the parts of the business being divested dropped 20% in FY18 from the year before and management is tipping another 25% decline as it annualised the 2HFY18 results (which were appalling).
What management is saying is that it doesn't believe it can turnaround these business units – ever.
Under such a gloomy scenario, any fire sale can be justified.
I don't think the AMP share price volatility is about to end anytime soon.
But AMP isn't the only one bruising from the Royal Commission. The Commonwealth Bank of Australia (ASX: CBA) share price and the Australia and New Zealand Banking Group (ASX: ANZ) share price along with National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) share prices have also been under tremendous strain.
I would stay away from the sector for now but that doesn't mean there aren't blue-chip stock opportunities in the market.
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