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Can Macquarie Keep It Up?

Australia | Feb 08 2023

This story features MACQUARIE GROUP LIMITED. For more info SHARE ANALYSIS: MQG

Macquarie Group’s nine-month performance in FY23 to date has already topped the record profit in the same period last year, but brokers debate whether FY24 might be a different story.

-Macquarie's quarterly beats on forecasts thanks to trading profits
-Annuity-style businesses go backwards
-Medium to longer term outlook remains positive
-Brokers not so certain about FY24

By Greg Peel

Macquarie Group ((MQG)) yesterday provided a quarterly update indicating profit for the first nine months of FY23 (March year-end) has already surpassed the record level achieved over the same period last year. This was better than brokers expected.

It was nevertheless a tale of two different income streams.

Beating all forecasts was the performance of the group’s Commodities and Global Markets (CMG) division, which are trading desks subject to market volatility. Energy price volatility post-invasion and resultant supply concerns led to increased customer demand for Macquarie’s gas and power risk management and execution service, while trading in fixed income and foreign exchange was elevated due to global central bank rate hikes.

Given there is no end in sight currently to energy market constraints, and central banks have signalled there’s more to come, management suggested yesterday CMG profit should be “substantially up” year on year in FY23, when a quarter ago it just said “up”.

On the other hand, the group’s annuity-style businesses – Macquarie Asset Management and Banking & Financial Services – which deliver more stable recurring revenue, have recorded profits well down year on year. This was, however, largely due to the large realisations of green energy investments booked in the previous period.

Brokers agree Macquarie will report another solid result for FY23 on top of FY22. Forecasts are for earnings to grow around another 6% year on year, on top of 56% last year. Seems like a big comedown but the point is FY22 featured a big bounce out of covid-impacted FY21 and to sustain that momentum is impressive.

But what about FY24, which begins in April? Can Macquarie keep up the pace?

Pros, Cons and Unknowns

It’s a fair bet that global central banks will at least pause their rate hike cycles by mid-calendar year, as they have indicated. This will reduce volatility in fixed income/forex markets, leading to less opportunity for trading profits. But there does remain a risk inflation turns and rises, particularly if energy prices surge once more, which brings us to the war.

We have no idea how long the war will last, nor its outcome. Supply constraints continue to pressure energy prices. Increasing demand is also expected out of China as the economy reopens and Beijing pumps in the stimulus. But elsewhere across the globe, the impact of rapid rate rises will be felt causing economies to at least slow if not recede. This will impact on commodities demand in general.

The default position from brokers at this stage is that Macquarie’s CMG division is likely to see a pullback in trading opportunities in FY24 and thus profits. Unless prices do remain “stronger for longer”. But brokers have also long lauded the diversified income streams of the Macquarie Group.

Differing Views

Morgan Stanley (Overweight) expects commodities revenues to normalise in FY24, but offset by better gains in asset management and retail banking. Macquarie also has substantial investments in Green Energy and Infrastructure, for which public asset prices have performed better than average. So the group's gains on sales could surprise on the upside early in the M&A recovery cycle.

M&A activity substantially slowed in 2022 from 2021 as rate hikes reduced borrowing capacity, and increased risk.

Morningstar, via Ord Minnett (Hold), agrees, suggesting:

“We continue to expect Macquarie’s global expertise and reputation to capitalise on growth in global infrastructure and renewable energy investment over the next five years. This will lead to greater assets under management, profits on asset realisations and lending opportunities."

UBS (Buy) makes note of Macquarie’s excess capital position, which:

“…provides management and the Board optionality for inorganic growth. The most likely use of this capital might be aimed at further consolidation in the asset management industry (teams or businesses) or alternatively further organic growth in the domestic banking market, in our view.”

Goldman Sachs suggests the medium term outlook for Macquarie Asset Management’s Private Markets business remains positive, given elevated levels of deployable equity and the opportunity this will provide once private markets allow this capital to be deployed.

But Goldman Sachs remains Neutral on the stock given it does not believe the level of outperformance from commodities income can be sustained, which will represent an earnings headwind for FY24 and beyond, and because the stock is trading on a forward PE multiple some 24% above its long-term average.

Credit Suisse goes a step further in noting CGM’s success, particularly in gas and power trading, is all about volatility, and looking beyond FY23 the broker does not capitalise these benefits and thus forecasts more moderate earnings.

“Our Underperform rating is based on our view that MQG is at peak earnings and that mix of earnings is now skewed to more volatile and therefore lower quality earnings.”

Credit Suisse has the only Sell-equivalent rating on Macquarie Group among FNArena database brokers (of which Goldman Sachs is not one). The balance is split two Buys and two Holds.

The database consensus price target has risen to $199.13 post-update from $186.55 prior.

Yesterday the stock price rose an uncertain 0.7% on release, in a session otherwise dominated by RBA hawkishness. Following today’s broker assessments the stock is up 2.3% (at the time of writing), in a more positive market.

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