Australia | Jan 20 2010
By Chris Shaw
Macquarie Group ((MG)) may still face some significant headwinds that should make FY10 earnings relatively uneventful, but in the view of Citi this is somewhat masking what is a highly promising FY11 outlook when recent acquisitions will make a fuller contribution, so adding to the overall positive earnings momentum for the “Millionairs Factory”.
The expectation is that FY10 numbers will be dominated by flat underlying revenues, an increase in staff compensation and further write-downs in asset values, but FY11 results should receive a boost from the recent gains in equity markets, stronger exchange volumes, increasing levels of merger and acquisition activity, strong commodity demand and lower write-downs, as will the previously mentioned acquisitions made by Macquarie in recent months.
To reflect this, Citi has lifted its earnings per share (EPS) forecast for FY11 by 3% to 420c, which compares to its FY10 forecast of 331.9c. Given the strong outlook for FY11, Citi has upgraded to a Buy rating from Hold previously, while lifting its price target to $59.86 from $54.84.
This highlights its view Macquarie is cheap at current levels given Citi’s estimate of a further $1 billion in acquisition capacity, expectations return on equity will improve in coming years and the fact the stock at current levels is trading at a 25% discount to its long-term earnings multiple of around 16 times.
Credit Suisse’s EPS forecasts are relatively close to Citi’s numbers at 336.9c in FY10 and 418c in FY11, its positive view based on an expectation Macquarie will enjoy an earnings upgrade cycle as consensus forecasts appear conservative given an improving operating environment, ongoing expansion of its business platform and monetisation of excess balance sheet strength, capital and liquidity into higher earnings.
This upgrade cycle may start sooner than Citi is suggesting as Credit Suisse sees upside risk to 2H10 earnings guidance from the company given stronger than expected volumes in equity and equity related activities, which has positive implications for the generation of fees. Current guidance is for reported profit in the second half of FY10 to be in line with the first half so by annualising this CS notes its forecast is around 15% above this baseline guidance compared to a consensus average of about 6% above.
Consensus EPS forecasts for Macquarie according to the FNArena database presently stand at 317.5c for FY10 and 414.8c in FY11.
Reflecting its positive view, Credit Suisse leads the way in terms of price targets for the stock at $67.00, which compares to the average target according to the FNArena database of $56.65, up from $56.03 given today’s increase to Citi’s target. The database shows Macquarie scoring a total of two Buys and seven Holds, highlighting Citi and Credit Suisse are pricing in something the rest of the market is yet to factor into its models.
Shares in Macquarie today are higher and as at 1.10pm the stock was up 1.6% or 85c at $52.55, which compares to a range over the past 12 months of $15.00 to $58.80.
FNArena’s R-Factor, which was specifically designed to oversee the Australian share market on a two year’s view, shows the shares are currently trading at an FY11 PER of 12.7, with projected consensus EPS growth rates of some 2% this year and more than 30% in FY11. Implied FY11 dividend yield is 4.4%.