A forward multiple of less than 11, dividend yield of 6.1%, and a business that generates 68% of its revenue offshore. That’s Macquarie Bank. And if you believe that Aussie dollar has further to fall, then Macquarie (ASX Code: MQC) should be on your shopping list.
One of the best performers on the ASX last year with its share price rising 42%, it has been one of the laggards this year. Despite Friday’s better than expected full-year results, Macquarie is still down 21% this year, closing Friday at $65.10.
The market’s muted reaction to the result was unusual, given that it beat forecasts and Macquarie’s outlook for 2017 was reasonably upbeat. But it was a strange week for bank stocks, with ANZ, NAB, Westpac and Macquarie posting results. The table below shows how the banks fared over the week.
[1]Summing up the results:
- Westpac underwhelmed last Monday as expectations were high going in. While the exposure to the four single names got most of the attention, there were few standout positives in the first half;
- ANZ surprised on the upside on Tuesday, as expectations were so low going in. The market liked that ANZ bit the bullet on the dividend, is dismantling Mike Smith’s Asian strategy and is reverting to being an Australasian retail and business bank;
- NAB reported marginally better than expected. Although the market wasn’t convinced about its bad debt provisions, they liked that the margin erosion in the business bank had stabilized;
- Macquarie reported better than expected, although it didn’t blow anyone away.
This morning, Commonwealth Bank reported 3rd quarter cash earnings of $2.3bn, up from $2.2bn in the corresponding quarter of 2015. Loan impairment expenses were higher at $427m for the quarter, compared to $256m in 2015. Like Westpac, the Bank cited a small number of relatively large exposures to corporate clients as the reason for the deterioration.
Macquarie’s result
Macquarie’s net profit for FY16 (it has a 31 March balance date) came in marginally ahead of estimates. FY16 profit of $2.06bn was up 29% on FY15. After a very strong first half, the second half performance of $0.993bn was up 7% on the same period in FY15, but down 7% on the first half of FY16. The first half had benefitted from some one-off items such as performance fees. Overall, the numbers were 2% to 3% better than the analysts had forecast, but part of this was due to a slightly lower effective tax rate.
Two things in particular stood out from the result:
- 68% of Macquarie’s income was generated offshore. The Americas region alone earns the same revenue as Macquarie in Australia (see below). Macquarie says that a 10% movement in the Aussie dollar has a 7% impact on full year NPAT; and
- Annuity style businesses generate 70% of Macquarie’s net profit contribution. Macquarie’s Asset Management Group manages $479.9bn of funds.
[2]The contribution of Macquarie’s six business units is set out below.
[3]Macquarie is currently forecasting that the FY17 result for the Group is expected to be “broadly in line” with the FY16 outcome. This is obviously subject to the usual caveats, including market conditions, foreign exchange, and potential regulatory changes and tax uncertainties. Over the medium term, it is a little more upbeat, as the following slide attests to.
[4]Click here to download a larger image [5]
What do the brokers say?
The brokers are reasonably positive about Macquarie, with Deutsche Bank upgrading Macquarie to buy from hold following the result. The following table shows the recommendations/ratings of the six major brokers, who have updated their forecasts following Friday’s announcement (source: FN Arena).
[6]Based on Friday’s closing price, Macquarie is trading at a multiple of 10.8 times FY17 earnings, and 10.7 times FY 18 earnings. It is forecast to yield 6.1% in FY17, and 6.8% on FY18 numbers. Franking can be expected at around 40%.
My view
Macquarie represents for me a growth stock at a reasonable price. A real Australian success story, the Macquarie team knows how to deliver and while the FY17 forecast is in line with FY16, last year’s outcome was a big increase on FY15 and any forecast at this stage is going to be tinged with a conservative bias.
The multiples are attractive, as is the yield.
What are the short-term risks? A global equities downturn, which makes it harder for the capital markets style business and impacts performance fees and other asset fees for Macquarie Asset Management, and/or the Aussie dollar moves materially higher. With the RBA now back firmly on an easing bias and the US Fed seemingly in no hurry to raise rates, I think the latter can be crossed off. Macquarie is in the buy zone.
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