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Treasure Chest: Upside For Macquarie Group

Treasure Chest | Mar 31 2020

This story features MACQUARIE GROUP LIMITED. For more info SHARE ANALYSIS: MQG

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Has the sharp and severe drop in the Macquarie Group share price provided a buying opportunity?

-Unlikely to beat the prior year in FY20
-Risks are not as great as in the GFC
-Earnings could rebound quite quickly


By Eva Brocklehurst

In the last month Macquarie Group ((MQG)) has come under considerable pressure, with the share price slumping severely, and JPMorgan asserts the market was slow to factor in the downside risks of the coronavirus crisis for the business.

At the February briefing, Macquarie Group signalled its market-facing businesses were "significantly down", as record gains in the prior corresponding third quarter were cycled.

Hence, while brokers acknowledged the tough comparables for the fourth quarter meant the company was unlikely to beat the prior year in FY20, the tendency for Macquarie Group to be very conservative when it came to guidance was assumed.

At the time, Citi did point out that, while Macquarie Group was achieving customer growth in its commodities segment, momentum was largely on the back of favourable market conditions …and nothing lasts forever.

The February briefing expected FY20 to be "slightly below" FY19 and management pointed out there were no large asset realisations scheduled for the fourth quarter, which reduced the likelihood of beating guidance.

A month is a long time and markets have subsequently deteriorated significantly. As a result, the more than -40% drop in the share price from the February peak presents a strong buying opportunity, JPMorgan believes.

This drop, while nothing in comparison to the GFC when the stock fell -84%, is on par with the 2001-02 correction. JPMorgan does not believe the risks are as great as in the GFC as Macquarie Group's capital, funding and liquidity metrics are all exceedingly better.

Moreover, the broker cannot altogether dismiss further risks, including the damage to corporate activity and depressed commodity prices, but believes the extraordinary support being offered by governments should ensure the recession is "short and sharp".

Buying Opportunity

Hence, there is an attractive risk/reward in place and the broker's rating is upgraded to Overweight. While the recent downgrade to Neutral was on the back of impairment risks, the broker's numbers now reflect the prevailing issues and the asset management division is expected to remain resilient.

Moreover, past downturns have always delivered expansion opportunities for Macquarie Group and a solid capital position provides flexibility. Credit Suisse also upgrades, to Outperform from Neutral, given the slump in the share price.

The broker is not waiting for guidance to be withdrawn and also envisages further risks to FY21, given annuity businesses are likely to start from a lower base and performance fees are likely to fall because of asset price deflation.

There could be increased impairments which could be recognised in FY20 and/or FY21. Hence, Credit Suisse anticipates FY20 forecasts to be -10% below FY19. FY21 forecasts are also reduced by -20%, to be -7% below FY20.

The broker suspects Macquarie Group may not provide any guidance at the FY20 result and, while there may be near-term earnings risk, this is a quality business that is likely to rebound quickly.

FNArena's database has four Buy ratings, one Hold (UBS) and one Sell (Citi). The consensus target is $128.48, signalling 42% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 6.4% and 6.1% respectively.

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