Macquarie Group To Bounce Back In FY22

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

Asset realisations are likely to be more difficult for Macquarie Group in the year ahead, along with heightened impairments, but brokers find many reasons why the wide-ranging investment business will prevail once again.

-Robust capital position to take advantage of market dislocation
-Renewables and asset developments differentiate Macquarie Group
-Strong rebound expected in FY22
 

By Eva Brocklehurst

The uncertainty created by the coronavirus pandemic is affecting Macquarie Group ((MQG)), despite its robust and wide-ranging investment business. Asset realisations are likely to be more difficult in the year ahead, impairments worsen and the commodity outlook is, well, muddy.

UBS assesses lending has become more challenging and further asset impairments cannot be ruled out. Yet most businesses continue to perform well.

Moreover, Macquarie Group has a strong capital position whereby it can take advantage of market dislocation. The group's capital surplus rose to $7.1bn although the final dividend was reduced by -28%, providing a pay-out ratio of 50%.

The final dividend will be funded entirely by the non-bank group. The company will raise additional equity from a discounted dividend reinvestment plan and issue an employees share plan consistent with APRA's guidance.

UBS assesses this will provide additional capital buffers, should the global economy weaken further. Additionally, there could be investment opportunities during the current downturn that support the next phase of growth.

The broker points out this is consistent with an "acquisition spree" Macquarie Group undertook following the GFC. However, the current travel restrictions make cross-border acquisitions more difficult in the short term.

Goldman Sachs does not expect the current crisis to be as severe for Macquarie Group, as it has not originated from within the banking system, although notes that around 18% of revenue in FY20 was from performance fees and investment income, a source that will largely disappear in FY21, in keeping with the company's commentary. The broker's base case scenario is for FY21 investment income and performance fees to move close to zero.

Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, continues to envisage earnings risk in FY21 but assesses the balance sheet and capital position are strong, as evidenced by the 12.2% CET1 ratio and the surplus capital. Still, the range of possible outcomes in FY21 and FY22 remain wide and the broker retains a Neutral rating with a $127.32 target.

Impairments

Higher impairments drove the miss to Morgans' forecasts in FY20 and the divisional commentary points to areas of softness but the broker finds the performance credible against a tough backdrop.

Ord Minnett forecasts a fall in net profit of -10% in FY21 on higher impairments, lower performance fees and lower gains on sale. A strong rebound is expected in FY22, with profit growth of 30% as the pandemic eases and significant liquidity in global markets means the asset chase can begin again.

Credit impairments in FY20 were greater than Morgan Stanley expected, and are likely to rise to around $1.5bn in FY21 while the cycle is far from finished. Moreover, the broker incorporates a drop of -33% in FY21 performance fees and suspects the disruption to private markets is now broader than what occurred in the GFC.

Asset Management

Offsetting this, the equity investment book has grown substantially and the renewables and asset development capabilities differentiate Macquarie Group. In terms of commodities, the broker finds it unclear how much revenue will fall once the volatility eases and whether energy markets remain subdued.

Morgan Stanley retains an Overweight rating, given the compelling long-term growth and an impressive performance in asset management. Despite the bear market, assets under management grew 8% half on half and second half base fees grew around 20%.

The broker considers guidance for flat base fees in FY21 a conservative estimate, noting earnings stability in this division becomes even more attractive during the downturn.

UBS considers it unlikely Macquarie will be able to stem a reduction in revenue in FY21, although the extent is difficult to estimate. Transaction volumes and values for hard asset sales are likely to fall, reducing the ability to generate gains on sale. This will also affect performance fees within the unlisted funds.

The broker notes the company has a high degree of operating leverage, with an elevated cost-to-income ratio. The bonus pool could be utilised to insulate some of the pressure. Moreover, discretionary expenditure, travel and entertainment costs are likely to plummet.

Credit Suisse agrees there is an "expense buffer" although envisages downside for the short term amidst multiple constraints around transaction volumes, asset realisations and performance fees, as well as potential for further impairments. Hence the broker downgrades to Neutral from Outperform.

FNArena's database has three Buy ratings, two Hold and one Sell (Citi). The consensus target is $116.25, signalling 4.9% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.1% and 5.2%, respectively.

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