Huntleys' Stock of the Week

Recommendations: Buy

WBC's current stock prices

Resilient March quarter fund flows. Legislative risk increasing.

Investment Rating:

Valuations of AMP should contain premiums for high market shares, the strong brand, the large customer base, the industry's lowest unit costs and especially the large aligned planner network, an enduring competitive advantage. We are optimistic about AMP's long-term prospects given the demographic trends and compulsory superannuation contributions which support the asset management industry's above-average growth. AMP is a leveraged equity market play, particularly on the All Ordinaries, because the market's performance affects discretionary investments, the value of funds under management and thus management fees, and the size of AMP's capital reserves. Other key risks are adverse regulatory reform, claims experience, reserve adequacy, policy renewal rates and new business levels. AMP suits the regular growth investor.

Event:

• AMP released its March quarter fund flows and funds under management (FUM) data.

• Net fund flows for AMP Financial Services (AFS), the financial planning arm, improved 63% on pcp to $210m due to a 94% improvement in Australian flows.

• AFS average FUM over the quarter fell 21% to $41.8bn. The same figure for AMP Capital Investors fell 15% to $89.7bn.

Impact:

• The fund flows were surprisingly strong for a quarter which saw a huge collapse in investor confidence.

• Their resilience and the equity market rally normally would lead us to upgrade our earnings forecasts and valuation. We leave both unchanged for the moment due to significant uncertainty about the outcomes of Superannuation Minister Nick Sherry's review of the superannuation system. AMP has the largest share of the superannuation market so has the most to lose from government pressure to reduce fees. This will probably cause some value erosion and the anticipatory uncertainty about it will last for the rest of this year.

• The fund flows improved due to 36% growth in retail super and 112% growth in corporate super. The support from corporate super, although it is lower-margin than retail, has been invaluable during the downturn. This vindicates AMP's long-term pursuit of the corporate super market and is a reason we rate AMP as one of the most resilient wealth managers.

• These falls will dampen 1Q09 earnings but the second quarter is looking better with the market rally. We could have seen the bottom of the negative earnings revision cycle for AMP.

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