Expansion Into Niche Markets And AI Initiatives Will Diversify Revenue Streams

Key Takeaways

• Continued cost reductions and focus on efficiencies are anticipated to enhance net margins and earnings moving forward.
  
• Expansion in wealth management and digital propositions is expected to boost revenue and market share through improved customer experience.
  
• NIM compression and competitive pressures challenge AMP's revenue growth, while digital transition involves costs that may affect short-term earnings and margins.

Catalysts

Provides banking, super, and retirement services in Australia and New Zealand.

• AMP has achieved a significant cost reduction, exceeding their own targets, and plans to continue focusing on cost efficiencies in FY '25 with a further reduction target, which is likely to enhance net margins and earnings.
  
• The company is focusing on growing its wealth management businesses, particularly through platforms and superannuation, showing strong cash flows and retention, which could drive future revenue growth.
  
• The introduction and scaling of AI and digital propositions, such as retirement solutions and digital advice, are expected to improve customer experience and attract new clients, potentially increasing revenues and market share in the superannuation and investment sectors.
  
• AMP's capital return program and share buybacks improve the capital structure and could lead to higher EPS, benefiting shareholders and potentially increasing stock value.
  
• The expansion into niche markets with the launch of a new bank targeting micro and small businesses aims to diversify revenue streams and leverage opportunities for margin expansion.

AMP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AMP's revenue will decrease by 22.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 23.6% in 3 years time.
• Analysts expect earnings to reach A$314.9 million (and earnings per share of A$0.13) by about February 2028, up from A$180.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, down from 19.5x today. This future PE is lower than the current PE for the AU Diversified Financial industry at 16.9x.
• Analysts expect the number of shares outstanding to decline by 2.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.4%, as per the Simply Wall St company report.

AMP Future Earnings Per Share Growth

Risks

• The slight decrease in total revenue, primarily due to a decline in bank earnings from net interest margin (NIM) compression, could impact AMP’s ability to sustainably grow earnings.
  
• Ongoing challenges in the New Zealand market and a highly competitive banking environment might hinder revenue growth, potentially impacting overall profitability.
  
• Continued focus on cost-control measures may not fully offset adverse market dynamics, posing a risk to net margins if significant revenue growth does not materialize.
  
• AMP bank profits have been affected by reduced net interest income due to NIM compression, which could further pressure earnings if the competitive environment persists.
  
• The transition to digital and AI solutions, while strategically beneficial, involves significant upfront costs and potential execution risks, which may impact short-term earnings and net margins.

Valuation

• The analysts have a consensus price target of A$1.514 for AMP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.77, and the most bearish reporting a price target of just A$1.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.3 billion, earnings will come to A$314.9 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of A$1.38, the analyst price target of A$1.51 is 8.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.