Macquarie Group Confirms A Difficult First Half

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Macquarie Group has confirmed the prospect of a weak first half, with a continued focus on provisioning and supporting clients through the pandemic.

-Even stronger seasonal skew to the second half in FY21
-Outlook for “deals” challenging, particularly cross-border transactions
-Prospect of the sell-down of Nuix could underpin second half
 

By Eva Brocklehurst

Amid a highly-anticipated reduction in transactions as well as travel restrictions, Macquarie Group ((MQG)) has confirmed ongoing provisioning in banking and financial services with a continued focus on supporting clients through the pandemic.

Pressure has mounted on investment income that affects both Macquarie Asset Management and Macquarie Capital, and the group has guided for the first half profit to be around -35% below the prior corresponding first half, which implies a cash profit around $950m.

In the absence of asset sales the impact of higher provisioning will be keenly felt and the short term outlook remains heavily dependent on the duration of the pandemic, the shape of the global economic recovery and government support.

Still, Morgans asserts Macquarie Group is well-positioned to ride out the downturn compared with other financial stocks, while taking advantage of opportunities when they occur. The broker highlights two factors that may have slightly changed since the AGM.

First half investment-related income in Macquarie Capital has declined significantly, and in commodities and strong client activity in commodities and global markets did not continue in the second quarter, the latter being a prospect the group had previously flagged.

There is also an even stronger seasonal skew to the second half this year, given the timing of gains on sale and impairment charges and Ord Minnett envisages a wide range of possible outcomes for the full year, depending on the level of volatile items and impairments in the second half.

The broker continues to factor in a strong recovery in the second half based on a return to asset recycling towards the end of the financial year. The broker remains attracted to the growth drivers in Macquarie Infrastructure and Real Assets (MIRA), green energy and Australian mortgages.

Ord Minnett now forecasts a second half net profit of $1.45bn, up 14% on the prior corresponding half, to reflect higher gains on sale and performance fees as well as lower investment impairments and provisions.

Despite the soft commentary and guidance being weaker than expected, CLSA continues to believe this is a high quality business with structural growth trends over the medium term. Yet caution prevails for the short term given the drawn-out potential for the pandemic and the broker, not one of the seven monitored daily on the FNArena database, reiterates an Underperform rating with a $120.25 target.

At the other end of the spectrum, Bell Potter, also not one of the seven, remains confident the business is a long-term "cash and growth" story and retains a Buy rating and $135.00 target.

Guidance was actually better than Morgan Stanley expected. The broker calculates net profit in FY21 will fall -17%, which implies a rise in earnings in the second half of 3% as an easier comparable is cycled and market conditions stabilise.

UBS believes as deals are required to feed the "Macquarie machine" the outlook is challenging, particularly in the case of cross-border transactions for which physical due diligence is essential. Moreover, given a 72% cost-to-income ratio a sharp reduction in transaction-related revenue has an exaggerated impact on earnings despite some protection from a lower bonus pool.

Nuix

Several brokers consider the prospect of a sell down of the Nuix data security software business. in which Macquarie Group has a 70% stake, could support the second half. In recent months there has been speculation this may occur and, given an increase in revenue from this source as well as high multiples being paid for technology companies, UBS assesses it could lead to a substantial gain on sale.

Citi takes a stronger stance and includes in estimates a 50% IPO sell-down of the Nuix stake, to be completed before March 2021, while UBS expects the sale, if it occurs, would take place in tranches.

Otherwise, transaction volumes for hard asset sales have fallen and have reduced the ability to generate gains on sale. This will have an impact on the ability to generate performance fees within Macquarie Group's unlisted funds. The ability to recover revenue is likely to be a function of activity as the global economy recovers and travel resumes and is more an issue of timing, the broker adds.

Morgans calculates Nuix, if floated on an equity value of $1.5bn as per press speculation, could generate a net profit contribution of $300m. Furthermore, Citi anticipates the remainder of the stake will be sold over the following 12-24 months after being released from a 12-month escrow.

Pulling forward of the sale into FY21 means the broker upgrades net profit estimates by 4% and lowers estimates for FY22-23 earnings by -7-8%. Citi considers the deployment of the balance sheet will emerge as the critical way of restoring meaningful profit growth from FY22.

FNArena's database has three Buy and three Hold ratings. The consensus target is $125.15, which signals 4.1% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 3.2% and 4.7% respectively. Targets range from $107.50 (Credit Suisse, yet to update on the guidance) to $133.00 (Morgan Stanley).

See also, Subdued Period Ahead For Macquarie Group on July 31, 2020.

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