AMP Ltd (ASX: AMP) shares have been performing well recently, almost doubling off their lows of a few months ago.
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Profit upgrade boosts AMP shares
The share price was bolstered in mid-July when the company announced that it expected underlying net profit to be in the range of $170 to $180 million for the first half, up from $131 million for the same period last year.
The shares are now changing hands for $2.14 at the time of writing, up from lows during the year of $1.14, and up 32.9% over a 12-month period.
UBS believes that they have further to run, however, and the impetus is coming from somewhere perhaps unexpected.
UBS said AMP's China Life Pension Company (CLPC) could be a real driver of further share price gains for AMP, after a strong showing in the first-half profit preview the company released in mid July.
The broker said the results were a "wake up call", and that the division was perfoming very well.
UBS added:
China has now grown to represent about 33% of AMP's underlying profits surpassing the key Platforms divisions as the primary profit engine. Our review of the Chinese Pension System and the CLPC statutory accounts suggests strong growth can persist presenting medium-term upside risk to consensus outlooks. Alongside this, while CLPC presents as a high growth asset-light wealth platform, we acknowledge the jurisdictional discount limits multiples investors are willing to capitalise Chinese profits.
UBS said the Chinese pension system was expected to grow by 100% to 200% by 2030.
For its part, AMP had grown CLPC at 23% per annum over the past 10 years, UBS said, "with operating leverage driving operating profits to grow at a faster 35% per annum".
UBS added:
These are 'platform-like' characteristics with further structural growth ahead which would ordinarily attract a premium multiple. However, we are also cognisant of country risk considering a state-owned enterprise major shareholder as JV partner.
In its recent update, AMP said the China business would make a contribution of $56 million to first-half net profit, up 24% on the previous corresponding period.
The company would also record an additional $5 million in profits due to favourable investment outcomes resulting from recent interest rate increases.
AMP shares looking cheap
On the basis of the anticipated growth in the China business, UBS has increased its price target on AMP from $2.19 to $2.55.
AMP will announce its first-half results on August 6.
