Macquarie Issues Cautious Guidance

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This story features MACQUARIE GROUP LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

When Macquarie Bank ((MBL)) announced its first quarter profit back in July, the number was substantially ahead of previously issued guidance. While under normal circumstances this might evoke a big re-rating for a stock, banking analysts across town simply nodded knowingly. For Macquarie has a long history of understating guidance, and as such analysts had automatically set their earnings expectations well above, having been bitten once too often. And it worked.

Only minor earnings forecast upgrades followed, but Macquarie had bigger fish to fry ahead. At the time the bank was under siege as a respected US analyst had called the Macquarie model unsustainable and issued a Sell. Between then and now the bank has successfully altered structure to a non-operating holding company (NOHC) and as such become the Macquarie Group ((MQG)). But in July the first inklings of the credit crunch were beginning to become apparent, and it wasn’t long before the share price had fallen out of the high-nineties to below $60. It was guilt by association.

Macquarie’s share price has since bounced back over $80 as the group has managed to allay fears of the effects the credit crunch realistically has on its business. This doesn’t necessarily mean, however, it is yet out of the woods on a perception front. There are a very large number of short positions being held in Macquarie. But the group’s interim result should have gone some way to changing those perceptions – emphasis on the “should”. At a time when US global investment banks have posted shocking quarterly results and more write-downs to come, Macquarie increased its half-year earnings by 45%.

FNArena was privileged to have a coffee meeting with Louis-Vincent Gave of GaveKal fame this week, and one particular question he asked  was why on earth Macquarie was sold down so much? Not one to go with the flow of herd mentality, Gave could only shake his head as “guilt by association” was all FNArena could offer. Many an analyst has now come to the conclusion that Macquarie cannot be strictly called an “investment bank”, and the move to become an NOHC reinforces that view. Macquarie is now described more readily as an “asset originator”. As such, the risk to the group post credit-crunch lies in its asset creation model, not in any dodgy credit security positions.

Indeed, management yesterday announced no material problem with trading or credit exposures. Furthermore, it announced an intended 10% increase to its recently acquired $8bn debt facility simply to meet demand. Citi notes Macquarie’s group-wide investment capacity (ungeared) is $13bn and only 3% of the debt it does have on issue rolls over in the next twelve months.

In the meantime, the credit crunch has been a boon to Macquarie in many ways, evident by the 142% increase in stock market trading profits for example. The group also sees opportunity, rather than adversity, offered by the new global credit regime.

But following the interim profit announcement Macquarie shares were sold down spectacularly once more. Why? Because management issued conservative guidance. And furthermore the group announced a dividend nothing like as big as an ambitious market had hoped. The analysts at JP Morgan suggest their peers were simply kidding themselves. It had also been a bad day on Wall Street prior, and at the moment Macquarie always cops a beating regardless.

JP Morgan has reiterated its ongoing surprise that Macquarie is roped in with investment banks. The analysts also suggest the attacks on the group’s business model “do not bear close scrutiny”. The credit crunch should throw up more opportunities than it undermines, and the infrastructure business model – while not without risk – is still offering opportunities as well. JPM also suggests the large short position in Macquarie makes for upside bias to share price movements, ultimately.

In general, the brokers were surprised by the result , but have conformed with guidance and lowered ongoing forecasts accordingly. Why is this time different? JP Morgan upgraded its forecasts. Conversely however, the average target price in the FNArena database rose from $100.53 to $103.57. This came despite UBS heeding warnings and lowering its target from $114 to $100.

The average target has remained above the $100 mark throughout the entire credit crunch fiasco, despite a significantly more negative view from GSJB Were. Prior to becoming MQG, Macquarie boasted a B/H/S ratio of 7/2/0, with Weres and Merrill Lynch the dissenters. Merrills does not put a target on Hold ratings. Only six of the nine have reported since the changeover, and that ratio currently stands at 5/1/0 with Weres the odd one out. Weres has set a target of $84.98 with every other broker over the $100 mark. The analysts have maintained that Macquarie shares still face risks to the downside if credit woes continue.

Other analyst do not necessarily disagree. There is a pervading feeling that Macquarie has now become a longer term investment opportunity. ABN Amro, for example, retains Buy but suggests there may yet be more chances to pick the stock up lower than here. At the moment there is not a lot that’s going to send the stock skyrocketing, but still much that may tip it over yet again, rightly or wrongly.

With a strong night on Wall Street and in the financial sector in particular, Macquarie has bounced 3% today at lunch time to be back over $80.

Subscribers please note: If you have had MBL as an alert stock in the FNArena system you will need to change to the new MQG code to be alerted in future.

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