Macquarie’s Growing Opportunity In The Americas

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After a recent tour of Macquarie Group’s operations in the Americas, brokers highlight the growing opportunity in the region.

-Macquarie's profits are increasingly tied to the Americas region
-Favourable structural change for the CGM division?
-More stable returns expected for Macquarie Capital 
-The opportunity for Macquarie Asset Management 

By Mark Woodruff

The Americas now account for around 38% of Macquarie Group’s ((MQG)) operating profit, a step-up from 22% in FY17.

This growing importance and growth prospects for the region were demonstrated to the broking community when management hosted a recent tour of the businesses.

Three divisions each have a key strategic area of specialisation and are complementary, notes UBS (Buy), allowing the group to provide its full product suite to clients.

Commodities and Global Markets has provided the greatest boost for Macquarie Group in the past two years, notes the broker.

This division, which comprises trading desks subject to market volatility, now derives around 40% of its operating income from the Americas, with almost 60% related to commodities.

Morgan Stanley (Overweight) highlights the diversity of the business, and now believes a range of factors supporting currently favourable market conditions (volatility) are structural and will continue to support commodities revenues.

Recent volatility support has come from US pipeline constraints set against growing gas production, US storage constraints, the growing international LNG trade, global weather patterns and the energy transition, explains the broker.

Speaking of the energy transition, the Americas opportunity for the Macquarie Capital division is partly driven by an attractive investment jurisdiction, recently made more attractive by legislation supporting investment in renewables and infrastructure, notes Goldman Sachs (Neutral).

The Americas contributed 56% of this division’s revenues in the first half of FY23, with nearly $10bn invested via principal activities.

Macquarie Capital currently derives revenue from an equal-weighted combination of principal investments and advisory fees across equity and debt. 

However, Morgan Stanley expects principal income will become larger as Macquarie Group grows its private credit book, which should also result in more stable overall returns.

This broker suggests upside optionality is evident for the division when taking into account principal equity investments have delivered a 24% average lifetime internal rate of return (IRR). The average holding period to achieve this return has been two to three years.

The $3.9bn equity book has large stakes in infrastructure ($1.5bn), which will experience resilient investor appetite, according to the analyst.

On the advisory side, Macquarie’s main focus is upon insurance, gaming & entertainment, government services, infrastructure, education software and also private equity sponsors.

Macquarie Asset Management

Just like Macquarie Capital, Macquarie Asset Management should benefit from very specific legislation in the US targeted at renewable energy and infrastructure, suggests Goldman Sachs, though management cautioned recent changes will take time to impact markets.

This division of Macquarie Group derived 54% of first half net operating income from the Americas.

Management expects growth for the business will be partly driven by broadening and deepening partnerships across wholesale and institutional clients in the region.

While the division’s global capital raising in the Americas has risen to an annual average of $6.7bn in FY21-23 from $3.6bn between FY18-20, the aim is to further increase this contribution.

Macquarie sees a wholesale opportunity via investible assets within the high net worth and mass affluent space, which is expected to grow to US$85tr from US$57tr in 2021, with around US$34tr (of the US$57tr) managed by wealth intermediaries.

Moreover, the group has expertise in Private Markets, to which the US$22tr global institutional market makes an outsized contribution, and the Americas represent nearly half of this overall market.

Management also intends to grow the scale and presence of Macquarie Asset Management in the region through acquisitions and expansion into new markets and adjacent sectors.

Three of the six covering brokers in the FNArena database have a Buy (or equivalent) rating for Macquarie Group, two are Neutral, and Credit Suisse has an Underperform recommendation. [Note: UBS has just acquired Credit Suisse, and has a Buy rating – Ed]

The average 12-month target price is $199.13 [or $205.96 ex-Credit Suisse] which suggests 15.7% upside to the share price at the time of writing.

Outside of the database, Goldman Sachs has a $197.53 target price and a Neutral rating.

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