Macquarie Group (MQG) is a company that some investors still loathe. Known as the “millionaires factory”, the payment of huge bonusses combined with public relations missteps around Sydney Airport, car parking and the taxi industry (to name but a few) seriously hurt its reputation in the broader community. But putting that to one side, as a company to invest in, it is a great company, and you have to own it.
Friday’s first half year profit result (1H23) re-confirmed why it’s a great company. The profit of $2,305m, up 13% on the corresponding half in FY22, was a clear beat on analysts’ forecasts which were in the $2.0bn – $2.1bn range. More impressively, 72% of Macquarie’s income was generated offshore. Passionate Australians might say that this is something to be truly proud of – an Australian company that is a global leader in its field of investment banking and financial risk management.
Macquarie has four operating divisions. Banking & Financial Services (BFS), which competes with the local Australian banks and provides home loans, business loans and wealth management services; Macquarie Asset Management (MAM) – a global specialist asset manager with almost $800bn in funds under management in fields as diverse as infrastructure, green investment, agriculture, fixed income and real estate; Commodities & Global Markets (CGM); a global business in trading and financial risk management; and Macquarie Capital (MC), a global business in advisory, capital raisings and equities broking.
The first two business units, BFS and MAM, are considered by Macquarie to be “annuity style businesses”, while the latter two, CGM and MC, are “market facing” businesses. In 1H23, the profit split between the annuity and market facing businesses was exactly 50%/50%.
That’s not to say that there isn’t volatility in the earnings of Macquarie Asset Management (MAM). While base management fees are fairly predictable, performance fees aren’t. Further, MAM also books considerable income from the divestment of assets, so the timing of these events can have a big impact on profit from one half to the next. In the first half, MAM was responsible for 31% of Macquarie’s profit.
Earnings from Commodities & Global Markets (CGM) and Macquarie Capital (MC) are also volatile, with a dependency on market conditions. In the first half, CGM was again the star. It was responsible for 37% of the Group’s profit, with profit up 15% on 1H22.
BFS generated 13% of group profit. It saw its home loan book rise to $101bn and deposits grow by $18.7bn to $122.0bn. Interestingly, in the 6 months to 30 September, Macquarie grew its home loan book by $11.5bn whilst ANZ grew its book by only $4.7bn.
Looking ahead, Management outlined a cautious stance. While the smaller BFS should be a winner from higher margins and business growth, MAM will be challenged by the non-repeat of the realisation of investment gains. Lower transaction activity is expected to impact Macquarie Capital. Forecasting for the powerhouse Commodities and Global Markets division is difficult, but that said, management appeared to be a little more upbeat.
Macquarie has a history of being conservative with its forecast and outlook statement, and then delivering a positive surprise when it announces its earnings. This profit result was another example of “surprising on the upside”. So while Macquarie’s caution shouldn’t be dismissed, it does need to be seen in the context of an organisation that places a premium on risk management.
CEO Shemara Wikramanayake concluded her ASX release with this statement:
“Macquarie is well positioned to deliver superior performance in the medium term. This is due to our deep expertise in major markets; strength in business and geographic diversity and ability to adapt the portfolio mix to changing market conditions; an ongoing program to identify cost saving initiatives and efficiency; ongoing technology spend across the Group; a strong and conservative balance sheet; and a proven risk management framework and culture”.
Shareholders were rewarded with an interim dividend of $3.00 per share (franked to 40%), up from last year’s interim of $2.72, and representing a payout ratio of 50%. While at the bottom of Macquarie’s payout range of 50% to 70%, it is consistent with Macquarie’s historical approach to the interim dividend.
What do the brokers say
The brokers are largely positive on Macquarie. Cautious in regard to some short term headwinds, but positive in regard to long term prospects.
The consensus target price was $189.72, 13.9% above Friday’s closing price of $166.50. Individual recommendations and target prices are set out in the table below.
Bottom Line
I am a huge Macquarie fan so it’s not a question of “if”, but rather “when” . I think it should be a core stock in most investors’ portfolios.
Because of its business mix and dependency on the buoyancy of markets and corporate activity, it has traditionally been a more volatile stock. In a bull market, it will typically outperform, and underperform in a bear market.
Macquarie Group (MQG) – Oct 17 to Oct 22
Source: nabtrade
So if you are feeling a bit cold on the market, you may want to wait. Put it on your watch list and wait for the opportunity. Otherwise,, I think it is reasonable buying right now. There is nothing in the profit result to suggest that Macquarie won’t continue to excel over the medium term.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.