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Infrastructure Growth Underpins Macquarie

Australia | Nov 04 2019

Is Macquarie Group simply being its usual conservative self, or are there real concerns about the ability to improve on the FY19 result?

-Benefiting from commodity expansion and shift towards lower tax jurisdictions
-Focus on infrastructure, technology and renewables
-Relative appeal acknowledged, given the challenges facing Australia's banks


By Eva Brocklehurst

Macquarie Group ((MQG)) has stuck by guidance after the first half result and, for the first time since May 2009, forecasts an earnings decline over the year ahead. The question is whether management is simply being conservative, as usual, or whether there are real concerns about growth. Guidance is for FY20 to be "slightly down on FY19".

Yet first half cash earnings rose 11%, revenue grew 8%, there was 22% growth in Macquarie Asset Management and an 8% rise in base fees. Commodities and global markets revenue rose 15% while banking and financial services revenue fell -3%. UBS points out global oil, gas & power, agriculture and metals & mining all provided strong support.

Arguably, Macquarie Group is in a better position to exceed guidance, Citi suspects, although this is not a base case, assessing the company is benefiting from being in the right place at the right time, given heightened geopolitical tensions and unexpected tight supply in US natural gas. Meanwhile, a shift in revenue towards lower-tax structures and jurisdictions has delivered a easing of the tax rate for the group to just 20.5%.

FY19 benefited from gains on sale and buoyant commodities but Morgan Stanley believes the business can absorb lower gains on sale and commodities revenue and still meet guidance, forecasting a -1% decline in earnings in FY20, although subsequently the business should remain in an earnings growth cycle. The broker is more confident the business will ultimately meet, or beat, guidance as it continues to evolve its business mix.

Bell Potter observes the market also appears to have glossed over the strong performance in higher-returning annuity-style asset management and market facing commodities and global markets.

However, Shaw and Partners points to numerous revenue lines which showed little growth. These include net interest income, brokerage, M&A, advisory and underwriting. Therefore, the investment case is becoming increasingly reliant on the company's skill in identifying high-returning infrastructure investments.

Alternative Investments

Macquarie Group is looking to focus on areas of strength, such as moving away from using its own capital in the aircraft leasing business and reducing its US and European equities, and Morgan Stanley is increasingly confident in the structural growth options available in infrastructure, renewables and technology, estimating the portfolio has grown by another $500m at the start of the second half on the back of the Formosa offshore wind farm investment.

The alternative asset management division, MIRA, is expected to increase base fee revenue, generated by 10-year closed-end funds operating in a structurally growing segment, as institutional investors look to increase allocations to real assets.

Moreover, Macquarie Group generates two thirds of its revenue outside Australia and Morgan Stanley is more positive about the near-term outlook for the global economy vs Australia underpinned by the company's track record and expertise in infrastructure and energy markets, including renewables.

Shaw and Partners points out the dividend pay-out ratio is in a range of 60-80% and, given a forecast for a $3bn profit in FY20, there should be $1bn in additional capital available for investment.

Macquarie Capital invested $1.4bn in the first half in a range of debt, conventional energy, infrastructure and green energy projects with green energy being the most dominant. The broker assesses it is becoming more difficult for Macquarie Capital to achieve its financial objectives by investing in mature infrastructure projects.

Bell Potter not one of the seven stockbrokers monitored daily on the FNArena database, notes an outstanding track record in beating expectations over the past 12 years and upgrades to Buy from Hold, increasing the target to $149 on the back of a better surplus capital position. Morgans, too, still considers the stock relatively inexpensive and appreciates the exposure to the long-term structural growth areas such as infrastructure and renewables.

Credit Suisse on the other hand downgrades to Neutral from Outperform as the shares are trading close to its target. While the broker considers Macquarie Group a quality business, upside appears limited for the near term. The stock is no longer overly cheap, and there is only modest potential upside, although, given the challenges being experienced by most banks, Ord Minnett acknowledges there is some relative appeal in Macquarie Group.

Shaw and Partners, also not one of the seven, has a Buy rating and $136 target. All up, there are three Buy ratings and three Hold on the database. The consensus target is $134.65, signalling 0.4% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 4.4% and 4.5% respectively.

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