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The Sydney Morning Herald

Hurdles ahead cut forecasts for AMP

Author: Anthony Hughes
Date: 16/11/2002
Words: 506
          Publication: Sydney Morning Herald
Section: Business
Page: 48
Broking analysts have lowered their forecasts for AMP's net profits this year as it absorbs the costs of its restructuring and continues to see its results weighed down by poor investment markets.

But chief executive Andrew Mohl's restructuring announcement, including a reduction of up to 1210 jobs and a $50 million charge against this year's profit, also raised concerns about 2003 earnings of AMP's best performing division, Australian Financial Services (AFS).

Despite expected cost savings of $100 million in 2003, AMP flagged on Thursday that the AFS division's return on invested capital was projected to fall from 18 to 16 per cent next year because of weak investment markets and retention of some of the $1 billion in capital earmarked to be released from the business earlier this year.

Merrill Lynch has cut its 2002 net profit forecast for AMP from $828 million to $778 million, though this would be ahead of 2001's $690 million. Analysts expect the former mutual's profit to head back over the $1 billion mark in 2003 as markets improve.

Investors liked the changes, which include an exit from manufacturing banking products other than mortgages. AMP shares rose 46c to $12.50 yesterday.

``The key point we would make is that we are taking this action to create a more efficient, streamlined organisation, one that can withstand ongoing weak markets, if that's what's in store for us, and one that is able to compete effectively and aggressively in a competitive environment," Mr Mohl told analysts on Thursday. ``In essence, the reform agenda is about focusing on what really matters and doing the basics really, really well."

Merrill Lynch said Mr Mohl had delivered a message of returns over growth, but it wondered whether shareholders would see the full benefits of the initiatives outlined.

The broker is maintaining its neutral opinion on AMP shares, arguing ``it is still very difficult to assess the impact of market volatility on the group and in particular the UK life franchise.

``The lack of incremental return on invested capital growth in the Australian financial services business is disconcerting," it said in a note to clients.

Aegis Equities Research's analyst, Selwyn Chong, said AMP's share price would be constrained in the short term due to the uncertain capital position, but expected the market to support Mr Mohl's work to address the issues.

``Once this has been done, we expect value to return to AMP in support of our buy recommendation," he said.

One uncertainty to arise from the briefing is what will happen to the $500 million in capital AMP plans to release by restructuring the banking business. Mr Mohl did not say if this sum would be returned to shareholders or reinvested in other businesses, though it is clear he has little tolerance for ventures not contributing a worthwhile return.

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