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Subdued Period Ahead For Macquarie Group

Australia | Jul 31 2020

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

Despite the challenges posed in FY21 Macquarie Group remains in a strong position to take advantage of any opportunities which present.

-Tough comparables ahead in the second quarter
-Fortunes linked to the global economic environment
-Yet well able to capitalise on a post-pandemic recovery

By Eva Brocklehurst

Earnings pressure is in evidence across several divisions and amid general uncertainty Macquarie Group ((MQG)) has resisted providing further guidance for FY21. The first quarter was in line with most expectations and slightly lower than the prior corresponding quarter while the performance of the various business divisions was mixed.

The sale of the EU rail operating lease to Akiem provided a boost to asset management, partially offset by banking and financial services where loan provisioning drove lower income. Macquarie Investment Management performed strongly, with the outperformance of three-year benchmarks increasing to 81% from 69%.

The markets contribution was lower, primarily from lower investment-related income in Macquarie Capital, reflecting lower gains on sale. Macquarie Group participated in 95 transactions worth $77.7bn compared with 87 transactions worth $92bn in the prior corresponding period.

In commodities the strong start to the quarter did not persist and activity slowed considerably. Most brokers take comfort in the company's cautious stance, which is supported by a strong balance sheet. The infrastructure division deployed around $5.5bn of capital in the quarter and had $25bn ready to deploy the end of June. Surplus regulatory capital was also higher at the end of the quarter.

This was a reasonable start to the year given the context, Ord Minnett asserts. However, the second and third quarters are likely to be more subdued, because of delays in capital recycling and the recent strength in the Australian dollar will be unhelpful.

As the share price has run up strongly in recent months and the broker considers there is only modest potential upside, leading to a downgrade to Accumulate from Buy.

Challenges Ahead

Morgan Stanley suspects there is upside risk to consensus estimates which imply FY21 earnings will fall -15-20%, also noting the second quarter of FY20 was much stronger than the first and this will make for tough comparables in the rest of the first half.

Citi agrees the main challenges lie in the second quarter and this could explain the lack of further FY21 guidance and lifts FY21 estimates by 16% to reflect the rail sale and better trading revenue in commodities.

Higher banking bad debts, reduced fund balances, lower transaction activity and some increased support for airline clients from Macquarie Airfinance have all contributed to the tough start to FY21.

The company has also pointed out some areas of strength are likely to normalise over the remainder of the year. Still, Morgans considers the bulk of the issues issues are largely cyclical in nature and should ease into FY22.

The broker points to some positive aspects to the AGM update including healthy growth in areas of banking and financial services such as deposits, home loans and funds on platform, which all rose between 4-9% over the quarter.

Bell Potter highlights that the company's fortunes are heavily linked to the global economic environment and in the current crisis pressures are inevitable. The broker reduces profit estimates for FY21 by -5% after factoring in softer Macquarie Capital contributions and higher provisions for the pandemic.

Growth Opportunities Remain

Bell Potter considers the stock a long-term "cash and growth" entity and well-placed to take advantage of any opportunities. The broker asserts, when it comes to capitalising on a post-pandemic economic recovery, Macquarie Group is a number one pick. Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $135 target.

The quarter was reasonable, given a challenging environment, and UBS agrees Macquarie Group is still well able to take advantage of opportunities that may arise during the downturn. In the near term, the stock is a leveraged play on markets.

The dividend pay-out ratio has been reduced to 50% which will take the first half dividend to $1.50, although UBS notes the advice from the Australian Prudential Regulatory Authority that dividend pay-outs should be 50% of earnings only applies to the bank arm and not the group as a whole.

The significant global central bank intervention that is currently occurring should provide better long-term opportunities in real assets, Citi observes. FNArena's database has three Buy ratings and three Hold. The consensus target is $120.65 signalling -2.8% downside to the last share price. Targets range from $105 (UBS) to $133.40 (Morgans).

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