Macquarie Group Retains Positive Momentum

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

Taking the Quadrant Energy sale into calculations, brokers revise up earnings estimates for Macquarie Group, despite the usual “broadly in line” guidance.

-Annuity-style components of earnings expected to maintain momentum
-Lack of growth in net interest income not an issue for Macquarie Group
-Sizeable asset realisations remain on the agenda
 

By Eva Brocklehurst

Macquarie Group ((MQG)) has reiterated its usual ultraconservative outlook for FY19 results to be "broadly in line" with FY18, excluding the Quadrant Energy sale. The outlook, if the profit from the Quadrant Energy sale is factored into estimates, results in Morgans upgrading FY19 and FY20 estimates by 4-8%. The broker expects a post-tax profit of $100m on the sale.

Guidance did not surprise Bell Potter and annuity style components are expected to retain their positive momentum, such as base and performance fees, as well as growth in mortgages, business banking and platforms. Commodity and global markets are expected to experience stronger activity.

Shaw and Partners believes Macquarie Group is the only one in its sector likely to sustain substantial revenue growth over FY19. This growth will be correlated with the health of financial markets and be evident in asset management, performance fees and profits from the sale of investments.

Bell Potter finds the outlook is underpinned by the company's ability to adapt the business mix to changing market conditions. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, considers the financial institution's track record outstanding, having consistently beat forecasts over the last six years.

This is believed to be largely because of Macquarie Group's transformation since the GFC, in addition to exceptional risk management and an emphasis on lower earnings volatility. Bell Potter maintains a Buy rating and $132.50 target. Morgans observes the stock's valuation is getting more stretched but 10% shareholder returns are still indicated over FY19 and therefore, its Add rating is unchanged.

Strong Equity Markets

The lack of growth in net interest income highlights an issue being faced by the banking sector but Shaw and Partners argues this is not an issue for Macquarie Group as it represents less than 20% of income. Strong equity markets are consistent with strong capital markets and this supports asset prices, providing the backdrop for asset sales.

Macquarie Group can also offset the earnings volatility inherent in the timing of asset sales via expense management, to some extent. Shaw and Partners, not one of the eight monitored daily on the database, upgrades estimates for growth in earnings per share from FY19-21 to 6% per annum, from 5%. The target is $130 and the rating is upgraded to Buy.

Although some investors may have been looking for better guidance, the update is consistent with Morgan Stanley's expectations and, with the stock falling -5% over the past week, signals the outlook is already reflected in the share price.

More Asset Realisations

Morgan Stanley expects around 10% earnings growth going forward, with support from strong markets, a weaker Australian dollar and the Quadrant Energy sale. Other gains on sale are skewed to the second half.

Citi updates its forecasts to reflect the gain on the Quadrant Energy sale in the first half of FY19. Consequently, estimates for FY19 earnings per share are revised up 6%. FY20 estimates are broadly flat, reflecting the revised timing of the Quadrant Energy sale, largely offset by the potential gain on sale from Nuix. FY21 estimates are marked down -4%, as the Nuix gain is now expected to occur earlier.

Morgans agrees the business is tracking well and there are reasonably robust activity levels in all divisions. Sizeable asset realisations remain on the horizon, particular PEXA and Nuix, so the broker suspects there is upside risk in the near term for earnings.

FNArena's database shows three Buy ratings and four Hold. The consensus target is $120.67, suggesting -3.4% downside to the last share price. The dividend yield on FY19 and FY20 forecasts is 4.5% and 4.8% respectively.

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