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Sizeable gap looms with AMP's share price

By Peter V O'Brien

Friday 15th August 2003

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The people who slashed the share price of financial group AMP could be easing the path of potential raiders. AMP shares closed last week in New Zealand at $5, an increase of 10c on the day but a 48c decline for the week.

The Australian price was $A4.46 on Friday an 11Ac recovery from the preceding day and a 39Ac drop on the week.

That was a typical market reaction to any unfavourable news about any company with a poor image. It showed again that supposedly expert professional investors usually act first and think later.

UK media reports of an internal management report, prepared for AMP's UK-based asset management business, Henderson Global Investors (HGI), triggered the price slump.

AMP had a quick response to the price movement, saying it wanted to clarify the media reports because some claims were inaccurate.

It is worth detailing AMP's statement, given the earlier market reaction.

"The draft HGI report was prepared by an internal audit team for senior management. The team reviewed internal frameworks and management processes that had recently undergone an improvement process. It was found that some of these improvements were not yet fully operational.

"The processes that were reviewed were primarily internal processes and not related to client matters. Most importantly, the review team did not find any breaches of any client mandate.

"In addition, HGI was subject to independent testing on certain internal controls by its external auditors as at December 31, 2003 [sic; AMP probably meant 2002]. Their review concluded that those internal controls were operating as described."

AMP said the report was also a first draft that contained some inaccuracies. The review process "is still in progress to correct these inaccuracies."

The share price improved after that explanation.

Brokers, analysts and others had earlier reacted to AMP Henderson's decision to move out of managing listed property trusts, noting it would reduce management income for the total group.

AMP has produced so much bad news, or news perceived to be bad, in such a short period that anything remotely doubtful hits the price.

The company has proposed a demerger of its UK interests, issued a massive amount of new capital, taken substantial write-downs and generally reorganised itself.

A detailed set of accounts for the six months ended June 30 will be available soon. They should confirm there is a sizeable gap between share price and net asset backing, the latter being assessed at realistic values.

Failure to value realistically would subject the company to more criticism, so it is likely to bite any necessary bullets.

It is reasonable to assume the share price/"real" NTA position is being watched carefully in places where people see merit in buying shares at substantial discounts to asset values.

No company is too big for a raid and/or takeover proposal. That is one reason investors should always be mindful of companies with relatively open share registers and a share price at a solid discount to nta (NBR, Feb 14).

Guinness Peat Group's then holding of just under 10% of Tower was noted as a strategic holding, which could lead to other developments. It has, with GPG increasing its holding and becoming a key element in Tower's future.

Tranz Rail's share price discount to NTA was also noted (before anyone made an offer) in the context of problems in calculation the real value of assets and the capacity to get appropriate cash flow from them as influencing opportunists or potential bidders.

Australian company Toll Holdings obviously did homework on the "real" values, particularly the condition of Tranz Rail's rolling stock and rail network.

The government will take control of the rail network if Toll's bid succeeds and the Australian group will have to deal with the rolling stock, but Tranz Rail has other valuable assets to cushion any capital investment outlays. Suggestions about Tower and Tranz Rail made in February were valid.

We will see what happens with AMP in time, but brokers advocating sale of the company's shares might do better if they went counter-cyclical and made buy recommendations.

Assets values seem to underpin the comparatively low share price and could provide a base for either earnings recovery or raid/offer.

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