Malcolm Maiden
THE fulcrum of the battle for AXA Asia Pacific is the Australian Competition and Consumer Commission's decision in mid-March about whether either a NAB or an AMP takeover of the group was acceptable and, if either was, on what terms. But the detailed December-year profit result that AXA AP released yesterday was another important milestone.
AXA AP's move from a bottom-line loss of $278.7 million in calendar 2008 to a profit of $679.2 million in 2009 - more than 20 per cent above the then consensus market forecast - was in line with the upgraded profit guidance it gave on January 21. But the details answered an underlying question that is important to NAB, the current suitor, and AMP, the jilted one: whether the earnings bounce is sustainable.
The short answer is that not all of the gain will be kept, but enough of it will be to maintain NAB and AMP's interest, and to keep alive AXA AP's unstated but obvious hope that a takeover auction develops. The detailed result also underlines the long-term attraction of the group's Asian franchise, which under either the now lapsed AMP proposal or the one from NAB that AXA AP is supporting would be on-sold to AXA of France, AXA AP's 54 per cent shareholder.
Questions about the durability of AXA AP's January profit upgrade arose as soon as it was announced, and they flowed from two things: natural scepticism in the market about bumps that are announced when a takeover is afoot; and the fact that AXA AP was announcing the profit boost only six weeks after it spoke to analysts and investors and left guidance unchanged.
The briefing took place at the beginning of December, about three weeks after AMP launched a takeover proposal that was backed by an exclusive alliance with AXA for the on-sale of the Asian assets. The period of exclusivity ended on February 6, freeing up AXA and NAB to begin negotiations for AXA to attach itself to NAB's $13.3 billion takeover in the same way.
AXA AP shares traded above the value of AMP's offer last year from day one, but AMP waited to see what AXA AP announced in its strategic briefing in December before deciding whether to respond.
No upgrade was forthcoming, and the modest sweetener that AMP announced on December 14 was influenced by that fact. Three days later, NAB trumped AMP with a higher counter-offer that AXA AP's board embraced, subject of course to there being no counter-bid.
Yesterday's profit result shows an expected bounce deriving from what might be called the resumption of normal economic, business and market conditions.
The $722.7 million investment ''experience'' markdown that wiped out last year's operating profit and pushed AXA AP to a non-cash loss of $278.7 million in 2008 was replaced by a $35.1 million write-up in 2009. And while operating earnings were flat at $553.6 million, they they were up 17 per cent in the second half compared with the first half.
Earnings from the Australian wealth management and insurance businesses that NAB and AMP are pursuing displayed the same trend, falling by 25 per cent to $176 million year-on-year, but rising by 35 per cent in the second half of the year compared with the first half.
The Australian operation did secure an earnings rise of about $10 million from so-called ''experience profit'' - earnings above or below what AXA AP had planned - that are as likely to be reversed as retained. And while management expenses in the local operation fell by 9 per cent from $297 million to $269.7 million, saving AXA AP $27.1 million, the cuts were forged in the crucible of the crisis. Inevitably there will be slippage as conditions normalise.
But AXA AP's first Asian beachhead, Hong Kong, boosted earnings by 6 per cent to $HK2 billion ($A286.2 million) and its businesses in South-East Asia boosted operating profit by 44 per cent to $50.2 million, about $13 million better than expected. The South-East Asian result only accounted for about 12 per cent of total group profit, but it shows why AXA of France is after the Asian franchise.
In newer markets including China and India, AXA AP is still on losses as it invests in people, property and information technology. But in Hong Kong it is established, and in South-East Asia it is well on the way to being so, with just over 2500 branches spread across Indonesia, the Philippines, Thailand and Malaysia, and an agent and an adviser workforce in those countries and Singapore that last year grew by 29 per cent to 20,273 people.
As the South-East Asian franchise continues to grow, its cost base is expanding more slowly than its income base, and profits are beginning to flow. The growth leverage there and elsewhere in Asia is capable of being extended for decades if expansion is managed carefully; and AXA of France can buy 100 per cent of the exposure by backing either the NAB deal or a renewed AMP one.
The ACCC holds the key, and it is initially most concerned about NAB's takeover proposal. But if, as is possible, it gives both groups the green light on the promise of asset carve-outs, the earnings upgrade that AXA AP detailed yesterday could justify an extension of the takeover price battle.
mmaiden@theage.com.au
