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Treasure Chest: Upbeat View On Macquarie

Treasure Chest | Aug 07 2019

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Will Macquarie Group again manage to beat guidance in FY20? Several brokers remain upbeat about the prospect.

-Slump in equity markets may trigger fears of a return to FY12
-Rally in Macquarie Group shares unsurprising, given significant infrastructure holdings
-Likely to encounter tough comparables as FY20 gets underway


By Eva Brocklehurst

Are subdued conditions here to stay? Bell Potter suspects the current slump in equity markets may embolden those with a negative view of Macquarie Group ((MQG)) that recall the difficult days of FY12.

Macquarie Group has started off FY20 in a solid fashion and reaffirmed guidance at the AGM, on the back of stronger-than-expected commodities, although this boost is expected to dissipate as the year gets underway. Still, Citi notes annuity-style businesses had a challenging first quarter.

The only business that grew was commodities and global markets (CGM), which benefited from strong conditions that the company does not expect to continue over FY20. A record 17% growth in earnings in FY19, skewed to the second half and underpinned by commodities and asset realisations, has meant Macquarie Group will cycle higher comparables as the year progresses.

Citi suggests this is the key risk over FY20, as there were record profits from oil/natural gas volatility and natural gas marketing which will be a challenge to cycle. The broker still envisages earnings risk is skewed to the upside but sticks with a Neutral rating.

Ord Minnett believes Macquarie Group is well-positioned in global investment banking, underpinned by niche areas including commodities, infrastructure and green energy. However, the contribution from volatile income streams is well above historical levels and at risk of normalising, while the earnings mix is also increasingly towards market-facing businesses.

The company has indicated net profit will be slightly lower than FY19, but Bell Potter considers current guidance is ultra-conservative. Macquarie Group has consistently beaten its early guidance over the last seven years. The broker, not one of the seven monitored daily on the FNArena database, retains a $140 target, suggesting the stock displays a good Buy opportunity.

Morgan Stanley acknowledges the company needs to deliver a strong first half, as the second half will encounter tough comparables, but assesses the downside risk is reduced, confident first half earnings can grow by around 9%.

The recent rally in the share price reflects risk-on market sentiment and declining long-bond yields, Ord Minnett observes. The stock has been weak since the FY19 result and the rally has been provoked by increasingly dovish central banks. The broker finds this unsurprising, given Macquarie Group has a significant holding of infrastructure assets.

Annuity-Style Model

The diversified financial group has distanced itself from FY12, moving to a more annuity-style model. Bell Potter notes such business models were relatively resilient seven years ago, while Macquarie Group's overall performance back then was affected by sovereign debt contagion from Europe as well as losses in Macquarie Securities and real estate banking – which are no longer stand-alone divisions.

Macquarie Group has recently restructured and Corporate and Asset Finance (CAF) is no longer a stand-alone division. Instead it will be separated into three parts and these incorporated into other divisions including Macquarie Asset Management, Macquarie Capital and CGM. Morgan Stanley notes CAF was once an important driver of profitability and merging it with other divisions is indicative of a lack of growth.

Macquarie Group has diverse management and entrepreneurial capabilities and is leveraged to the fast-growing wealth management segment, Bell Potter points out. There is a small footprint in mortgage lending, which is being addressed, while opportunities are envisaged for green investment bank earnings, amid an ability to capitalise on an upturn in global wealth services.

There are three Buy ratings and three Hold on FNArena's database with a consensus target of $131.28, signalling 10.2% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 4.9% and 5.0% respectively.

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