Is the AMP Limited (ASX: AMP) share price a bargain-hunters delight after it’s devastating crash to a record low yesterday?
That’s the question many investors will be pondering and could explain the 2.8% jump in the AMP share price this morning to $1.86, although the stock has since lost ground and is trading flat at $1.81 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is also trading at breakeven.
But before you jump on what you think could be the biggest blue-chip bargain of 2019, you might want to listen to what leading brokers are saying about AMP after management scrapped its dividend and warned it may not be able to sell its insurance division to raise much needed cash to turn the embattled business around.
Capital raising risk growing for AMP
Citigroup has uncharitably stuck to its “sell” and “high risk” rating on the stock with a price target of $1.70 a share as it believes the failure to sell AMP Life will increase earnings uncertainty and capital raising risks for the group.
“We previously presumed AMP would use most of the Life sale proceeds to fund the transition of its advice model, which we believe will require substantial capital over time,” said the broker.
“It may therefore be left with a stark choice of either delaying the strategy’s implementation or coming to market to raise capital.”
I can’t imagine AMP trying to do a capital raise with a record low share price. Things will look really ugly if it is forced to come cap-in-hand to shareholders.
Meanwhile, Morgan Stanley is also taking a dim view of the latest developments with the Reserve Bank of New Zealand putting tough conditions to approve the sale of AMP Life to UK-based Resolution Life.
“To salvage a Life sale, the parties need to renegotiate new terms, likely much less favorable to AMP,” said the broker.
“Industry data shows the Australia disability income market has deteriorated significantly over the past 12 months. We downgrade FY20e/21e Life earnings by >50% and downgrade valuation to 0.5x embedded value (previously 0.7x in line with sale price).”
This in turn has lowered Morgan Stanley’s price target on the stock to $1.50 from $1.80 a share. The broker has an “underweight” recommendation on AMP.
AMP facing ~$2 billion wipe-out
If AMP is successful in renegotiating a deal with Resolution Life to satisfy the demands from New Zealand regulators, it could see AMP take a circa $400 million haircut from the original offer price, according to Macquarie Group Ltd (ASX: MQG).
Throw in the impact of legislative changes from “Protecting Your Super” and “Putting Members First” and higher capital buffer requirements in New Zealand, the total consideration could be closer to $2 billion on Macquarie’s estimates. That would effectively wipe-out any capital return from the asset sale.
“With additional complexity returning and balance sheet concerns we see risks skewed to the downside and the turnaround story appears set to be further delayed,” said the broker.
Macquarie has a “neutral” recommendation on AMP with a $2 a share price target.
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The Motley Fool Australia owns shares of and has recommended Macquarie Group 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.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019