Australia | Nov 11 2020
This story features MACQUARIE GROUP LIMITED. For more info SHARE ANALYSIS: MQG
The setting will not get any easier for Macquarie Group in the second half as transaction activity remains low, yet the business is poised for upside in FY22 as a welter of investment opportunities become available.
-Zero interest rates signal the value of hard assets will rise
-Upside to earnings from capital deployment, reduced impairments
-Sell down of Nuix investment could support revenue
By Eva Brocklehurst
It's rare, but Macquarie Group ((MQG)) has experienced depressed revenue so far in FY21 as international borders remain closed, hampering transaction activity. The banking group has indicated the setting will not get any easier in the second half, amid further impact from the pandemic, fewer asset realisations and a lack of volatility in markets-facing businesses.
Nevertheless, UBS suggests Macquarie Group differs from other investment banks in that it is highly leveraged to hard assets. As zero interest rates are likely for the foreseeable future, the value of hard assets should rise. Once travel resumes deal flows should rebound sharply and this could mean a jump in performance fees.
Goldman Sachs interprets valuations as signalling a particularly strong and rapid rebound in FY22 revenue could be on the cards, and considers this overstated. As a result, the broker, not one of the seven stockbrokers monitored daily on the FNArena database, sticks with a Neutral rating and $136.81 target.
Morgan Stanley suspects the first half was a low point for earnings and anticipates a 30% recovery in FY22. Impairment losses have likely peaked although the broker assesses further improvement will be gradual.
With more than 85% of equity investments conservatively held at cost or lower, Morgan Stanley expects non-lending losses should also diminish. The main areas of uncertainty are Air Finance and commodities lending.
Macquarie Group provided no guidance for FY21 because of market conditions described as challenging and uncertain. First half net profit was $955m, which was down -32%. This was still a little better than guided, Bell Potter points out, and would have been much lower had it not been for stronger net interest and trading income and good cost management.
Macquarie Group relied more on capital recycling gains and performance fees than Ord Minnett expected in the first half, although the near-term prospect for these revenue items is considered robust.
The broker envisages potential upside to medium-term earnings from capital deployment, reduced impairments and a recovery in Macquarie Capital earnings. Themes underpinning this view include low rates, quantitative easing, liquidity in private equity funds and the push for renewables investment.
Macquarie Capital was the hardest hit segment, affected by lower fees and commissions and significantly lower investment income. Yet, surplus capital remains strong at $9.4bn and, as Morgans observes, is well up on the $7.1bn in April, benefiting from lower business capital requirements and FX movements.
Based on Australian dollar movements, Bell Potter estimates adverse currency could have knocked -10% off the first half profit, or contributed to almost half of the profit decline on a half-on-half basis. The broker, not one of the seven, has a Buy rating and $148 target.
Deal flows were subdued amid further impairments, and solid growth in loans was offset by net interest margin and cost pressures, UBS observes. Commodities were strong during April and May because of transaction activity and opportunities for market dislocation, particularly in oil & gold.
Goldman Sachs expects the commodities and global markets division will be significantly weaker in the second half because of subdued customer activity, and will maintain a close eye on volatility in key commodities to better gauge the revenue potential.
The result did little to change Wilsons' view as the drop in earnings was attributed to the pandemic and circumstances should improve dramatically heading into 2021/22. The broker points out, unlike the last crisis in 2008/09, Macquarie Group has avoided the need for equity raisings at depressed share prices.
Return on equity at 9.5% remains well ahead of the cost of capital and there is almost $10bn of surplus capital to deploy. Wilsons, also not one of the seven, has an Overweight rating with no target provided.
In recent months, there has been increased speculation Macquarie Group will sell down its position in data security software company Nuix, in which it has a 70% stake. UBS believes this could lead to substantial investment income and would expect the position to be sold down in tranches, potentially supporting revenue going forward.
At an implied valuation of $2.4bn, Citi believes Nuix will come to the rescue. The transaction should sustain second half earnings, and the broker considers it highly likely that 50% of the investment will be sold via an IPO, delivering a 12% boost to revenue.
Credit Suisse has decided not to adjust estimates, given a "widely reported significant asset realisation" is in the pipeline, preferring to await the structure and outcome of any transaction.
The database has three Buy ratings and three Hold. The consensus target is $136.87, signalling -4.0% downside to the last share price.
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