| Stock: | Macquarie Group Ltd | ||
| Exchange: | ASX | Symbol: | MQG |
| Date: | 11-May-20 | Latest price: | $108.50 |
| Market Cap: | $38.8 bn | Fair Value: | $125.42 |
| Forward P/E: | 15.6 | FV Payback (Years): | 11 |
| Forward Dividend Yield: | 4.09% | CET1 Capital Ratio: | 12.2% |
| Financial Y/E: | 31-Mar-21 | Rating: | HOLD |
| Sector: | Financial Services | Industry: | Capital Markets |
| Investment Theme: | Dividends & Growth | LT Trends: | none |
Summary
We consider Macquarie (MQG) to be priced at below fair value, but the technical outlook is bearish.
We rate the stock as a long-term HOLD because of its strong cash flows and competitive position. Weighting is 5.0% of portfolio value.
Valuation
We project flat annual revenue growth in the next 12 months, recovering to 8% in the long-term, with a provision of $1.5 billion to cover further impairment charges and under-performance of market-facing businesses. Estimated fair value is $125.42 with a payback period of 11 years.
The payback period recognizes MQG’s strong market position but also the uncertainty of financial markets.
Technical Analysis
MQG is in a primary down-trend and we expect another test of primary support at 70 before the bear market is over. Trend Index and Momentum below zero both warn of bearish market sentiment. Respect of primary support would provide a solid base for a new primary up-trend. Breach is unlikely but would flag another decline and a strong bear market.
Company Profile
Macquarie Group is Australia’s only sizable investment bank. Internationally diversified, the group employs 15,849 people in 31 countries, with its head office in Sydney, Australia.
Macquarie was innovative in setting up large infrastructure funds which provided a captive client for the group but most of these were dissolved after the 2008 global financial crisis and have been replaced as an income source by other annuity businesses. FY20 net profit contribution by activity:
Asset Management (MAM) manages infrastructure and real assets and securities investments for both retail and institutional clients in Australia and the US, with a total of $A607 billion under management in FY20.
Corporate and Asset Finance (CAF), with an asset and loan portfolio of $A21.3 billion (FY19) was broken up and integrated into MAM, CGM and Macquarie Capital in FY20.
Banking and Financial Services (BFS) has a retail deposit book of $63.9 billion, an Australian loan and lease portfolio of $A75.3 billion and a wealth management platform with funds of $A79.1 billion (FY20).
Commodities and Global Markets (CGM) offers broking, trading, hedging and finance on global securities markets including equities, fixed income, foreign exchange and commodities.
Macquarie Capital (MC) provides corporate finance advisory and capital raising services to corporate and government clients.
International Income
International income1 is net operating income excluding earnings on capital. Australia2 includes New Zealand.
Competitors
Macquarie competes with local commercial banks, fund managers and securities houses, and — with 67% international income in FY20 — a multitude of international investment banks.
Performance
Annuity-based businesses performed well in FY20 but cyclical, market-facing divisions experienced a significant fall in net profit contribution.
Asset Growth
- MAM assets under management grew 10% to $605.7bn in FY20, compared to $551bn in FY19;
- Banking & Financial Services (BFS) loans and leases grew 20% to $75.3 bn, funded by a 20% increase in deposits to $63.9 bn.
Segments
Market-facing businesses under-performed in terms of net profit contribution1 in FY20:
- Commodities and Global Markets (CGM) were level with FY19; while
- Macquarie Capital (MC) fell 75% after a stellar 89% increase in FY19.
Annuity-style businesses improved in FY20:
- Asset Management (MAM) was up 16%;
- Banking & Financial Services (BFS) were up 2%.
Net Profit Contribution1 is calculated before unallocated corporate costs, profit share and income tax.
Return on Equity
Return on equity fell to 13.6% due to an 88% increase in impairment charges ($1.04 bn compared to $552 m in FY19), related to the COVID19 outbreak and weak results from market-facing businesses.
Margins
Staff costs are Macquarie’s largest operating expense. Long-term growth in the ratio of Net Income to Employment Costs reflects Macquarie’s increased ability to leverage operating expenses.
Assets under management
Assets under management have grown at a compound annual rate of 6.4% over the last 10 years (FY10 to FY20).
Earnings per share
Earnings per share (EPS) has grown at a compound annual rate of 8.6% over the last 10 years or 9.6% over the last 5 years.
We project long-term growth of 8% in annuity-based assets (AM, BFS & CAF) and in earnings per share.
Capital structure
CET1 (Common Equity Tier 1) Capital Ratio improved to 12.2% in FY20 (FY19: 11.4%) calculated on risk-weighted assets using APRA Basel III standards.
The unweighted CET1 Leverage Ratio, based on total credit exposure, however, weakened to 5.1% in FY20 .
Capital ratios are adequate but not strong by our standards.
Dividends
Dividend payout of $4.30 (40% franked) for FY20 is down 25% compared to FY19 ($5.75 and 45% franked). We consider the dividend payout ratio of 56% (FY20) to be sustainable.
Forward guidance
Guidance for FY21 has been withheld because of uncertainty surrounding the COVID19 outbreak.
We have made a provision of $1.5 billion to allow for uncertainty over further impairment charges and under-performance of market-facing businesses.
Strengths & weaknesses
Macquarie is a world-leading infrastructure fund manager and in an excellent position to capitalize on massive expected investment in global infrastructure and renewable energy over the next decade.
Weaknesses
Like most investment banks, Macquarie relies on market knowledge and resourcefulness to identify new opportunities and innovate existing businesses. While they have an excellent track record, they can still make mistakes.
Cyclical fluctuations may affect performance.
BFS exposure to the highly-priced Australian property market is a vulnerability.
Disclosure
Staff of The Patient Investor may directly or indirectly own shares in the above company.