Australia | May 11 2015
– Macquarie result beats consensus
– Underlying earnings momentum
– FY15 hard to repeat
– Valuation an issue
By Greg Peel
Given strength in equity markets over the year ending March and volatility in other markets, such as oil, providing opportunities, brokers were assuming Macquarie Group’s FY15 result would be a reasonable one. However, there was always a risk Macquarie would disappoint on the basis of “cycling the comparables” from FY14.
FY14 was a year in which Macquarie spun-off its Sydney Airport ((SYD)) business, booking a big one-off profit in the meantime. It was also a year which saw the so-called “polar vortex” of a winter in the US, materially improving opportunities, and thus profits, for the group’s energy trading arm. While the FY15 profit might look solid on a standalone basis, it would still require a good performance to improve on FY14.
That performance turned out to be a 27% increase in earnings over FY14, beating consensus analyst estimates by 6%. But analysts are always wary of taking Macquarie results at face value. With all the moving parts, one-off items are a regular feature, and can hide what lies beneath.
JP Morgan breaks down the 27% increase as being largely being 15% from record performance fees, 6% from a lower tax rate and 6% from a lower Aussie dollar. This suggests to the broker that underlying earnings were indeed flat. Not such a great performance after all, except if we take into consideration Macquarie had to “beat” its aforementioned positive FY14 one-offs to even get to “flat”.
And the good news there, as far as JP Morgan is concerned, is that Macquarie achieved this thanks to clear momentum in traditional businesses. These include base fees for Macquarie Asset Management, net interest income from Corporate & Asset Finance, and Banking & Financial Services, and advisory fees for Macquarie Capital. The broker suggests higher levels of activity will flow through to FY16 numbers, bolstered by recent volatility in the domestic and Asian stock and bond markets.
But that is not to say FY15 hasn’t shifted the bar in the same way FY14 did. Conditions in FY15 were very favourable for Macquarie’s businesses, Citi points out. Strength in the equity market, strong activity in debt markets (RBA rate cut assisted), improved M&A activity thanks to consolidation in some sectors as well as a rash of IPOs, significant trading opportunities such as the plunge in the oil price, the ability to recycle a range of assets across leasing, infrastructure and equity, and a substantial fall in the Aussie all conspired to provide blustery tailwinds. Can Macquarie do it again?
Australian and US stock markets have run up and now apparently stalled, making record performance fees harder to achieve, the RBA has possibly ended its easing cycle and Fed is about to start tightening, an unusual burst of IPOs around end-2014 probably won’t be repeated, the oil price appears to have consolidated around current levels, and the Aussie is unlikely to fall by a similar percentage, if it manages to fall at all in FY16. And presumably Macquarie won’t be enjoying another 6% fall in its tax rate. Management has guided, at this early stage in FY16, to a “slightly better” result. But back before the GFC Macquarie was notorious for under-guiding and then over-delivering, and brokers suggest that now that the group’s GFC winter has turned to spring, conservative guidance is again the policy.
UBS points out that FY15 saw a return on equity for the group of around 14%, which represents the first time since the GFC Macquarie’s ROE has exceeded its cost of capital. The consensus among brokers is that despite having another strong year to benchmark against (the word “strong” was used by management some 50 times in Friday’s briefing, JP Morgan counted), momentum can continue into FY16. The recent acquisition of the aircraft leasing business will also begin to make a meaningful contribution.
There was some concern around $250m in provisions and write-offs, largely against the group’s $3bn resources book. Credit Suisse has voiced its concern albeit notes conservative provisions will protect future earnings, while UBS suggests Macquarie may need to take a look at its exposure concentration limits and credit underwriting practices.
The bottom line is nevertheless that brokers came out of the result presentation more confident Macquarie kick things along again in FY16 and consensus earnings forecasts have been raised to reflect this. It then just comes down to a matter of market valuation.
Three of seven FNArena covering brokers are happy to continue backing the group, and retain Buy or equivalent ratings. Deutsche Bank believes the stock has already re-rated to price in the positives, and thus retains Hold. JP Morgan concurs, noting the stock is up around 30% year to date. Citi is also on the same page, but points out Macquarie holds up favourably against the major commercial banks in the sector. Morgans (Hold) has yet to update its view.
That leaves three Buys and four Holds in the FNArena database. The consensus target has increased to $81.56 from $77.16 before the result publication, but at the last traded price, this suggests only 2.4% upside.
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