Money: Where now for AMP?

By Mark Fryer
Personal finance editor

This time last year, 1.8 million AMP policy-holders - 274,000 of them in New Zealand - had just one question: how high?

They had been issued shares when the insurance giant turned itself into a company and were eagerly waiting to see what heights the share price would reach when trading began.

These days the remaining shareholders are more likely to be asking the opposite question: how low? With AMP's share price this week falling to its lowest level yet, what is going wrong, and what are the chances of a recovery?

AMP's sharemarket debut last June 15 was a euphoric affair.

The shares, valued by AMP itself at around $A16, hit the Australian sharemarket at $A35.99, soared momentarily to $A45 and ended the day at $A23. On this side of the Tasman the price peaked at $31.02, before ending at $26.71.

But the euphoria was not to last. Since late last year AMP's share price has gone nowhere but down.

Locally, AMP shares ended the week on a new low of $19.35.

In Australia, the price has dropped more than 23 per cent since the start of the year, and this at a time when the Australian sharemarket overall has been rising.

One frequently-cited reason for AMP's fall is that the share price was too high in the first place.

The price was artificially buoyed up last year because AMP was added to Australia's all-ordinaries sharemarket index in several steps. Each time that happened, fund managers whose investment strategy is based on that index had to buy more shares, pushing up the price. But since that process ended, AMP has had to stand on its own feet.

As well, insurance companies in general are not fashionable among Australian investors at present, partly because of a proposed tax change which would increase the tax on the earnings of life insurers, AMP included.

AMP's subsidiary in Britain, Pearl Group, is also facing a Government plan to limit some fees charged by life companies.

However, AMP has also suffered its share of self-inflicted wounds, most notably from its efforts to take over another Australian insurer, GIO, in a $A3.3 billion deal.

Unfortunately for AMP, many GIO shareholders decided to hold on to their shares, the bid dragged on, becoming increasingly acrimonious, and AMP finally got only 57.5 per cent of its target rather than the 100 per cent it wanted.

That makes it difficult for AMP to merge parts of GIO's business with its own operations, and make the cost savings it was hoping for.

All of which means AMP may have to go through the whole drawn-out and costly process again, and mount another bid for the rest of GIO.

The fact that GIO suffered a major loss in 1988-99 didn't help either. The GIO bid also raised more doubts about the leadership of AMP's often-abrasive chief executive, George Trumbull, particularly over his ability to handle any future acquisitions and make them part of AMP. Rumours have been rife that he will leave AMP earlier than his planned departure date at the end of next year.

AMP suffered yet another blow on Thursday, with the unexpected departure of the head of its British operations, Richard Surface, widely touted as a replacement for Trumbull.

As well as GIO, AMP is still digesting the British-based National Provident Association, which it bought for $A3.6 billion, a price some critics have labelled as excessive.

Not even a higher than expected profit of $A1.03 billion for 1998-99 seemed to help, perhaps because investors saw so little of it; AMP announced a dividend of just 18Ac a share, a dividend yield of just over 1 per cent, even at the current low share price.

So much gloom. But is AMP being too harshly judged?

Plenty of people think so. Five reports issued recently by share analysts at major Australian brokers all come to much the same conclusion: AMP's share price is lower than justified. None of them is brave enough to predict a sudden improvement in the share price, but all expect it to be a good performer in the longer term.

Closer to home, Arthur Lim of broker Ord Minnett in Auckland sees things much the same way. Lim, who forecast the price drop late last year and suggested that AMP shareholders who wanted to get out do so then, says that at current prices the shares are starting to look like good value.

AMP, he says, "has had to fight an avalanche of negative news ... Just as the market was wildly optimistic when it floated, the market is equally negative now."

Shares often get caught in a rut for a long time, he says, but when the negative sentiment turns around it can happen very quickly. Not that he is expecting that to happen soon; what the markets want to see first, says Lim, is some sign that AMP is taking its various acquisitions and successfully fitting them in with its own business.

Others are even more optimistic. "This stock will be an enormous performer," says Andrew Kearnan, insurance analyst at Merrill Lynch Global Securities, who expects the price to hit $A20 by year's end. "Now is the time to get in and buy. It's a great opportunity at this price."

Among the many things AMP has going for it are its very strong brand name and a dominant position in the Australian insurance business - twice the size of its nearest rival.

In Australia and New Zealand, AMP has branched out into the banking business. It is also well placed to make money from Australia's pension savings market, which is growing rapidly, thanks largely to laws which force employers to pay a percentage of their workers' wages into savings plans.

The company's recent acquisitions, while they may take time to digest, also mean more potential profits in future. The purchase of National Provident in Britain, for example, gave AMP some 630,000 new customers.

AMP also got some supportive words this week - along with a warning - from the credit rating agency Standard & Poor's, which reviewed its operations after the National Provident and GIO deals.

While AMP's ratings might be downgraded in future if it failed to achieve the potential results of those deals, warned S&P, in the medium term the group was likely to make some big gains by combining the operations of its new acquisitions.

"The ratings reflect AMP's superior business position in its home markets of Australia and New Zealand and the greatly enhanced position of the British business following recent acquisitions, complemented by the group's very strong financial profile," said S&P.

Still, there are some doubters.

"Personally, I remain to be convinced," says Simon Botherway of Auckland-based Spicers Portfolio Management.

"I think Trumbull has been offside with the investment community and the board - he was very much brought in as a change agent, but whether he has the hands-on skills to manage that business successfully remains to be seen."

"We exited on day one and we haven't been a holder since. I still think the jury's out. The market needs some sign on the cost-cutting front and that they have a clear direction on where they are taking the company."

So where does all that leave the 1.2 million remaining AMP shareholders - 144,000 of them in New Zealand?

Lim cautions against doing what so many of us do - buying shares in optimism when the market is up, then selling in despair when it falls. If you didn't sell last year, when the shares were going for more than they were worth, he asks, why do it now when they are cheaper than they should be?

But while some investors will be happy to leave their AMP shares in the bottom drawer, others - especially if they own no other shares - may still want to think about selling and putting the money into something more diversified, such as a managed share fund.

Even if the optimists are right, having all your eggs in the AMP basket is likely to prove a riskier proposition than spreading your risks over a number of shares.