Macquarie Group: Cheap, But Where’s The Catalyst?

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This story features MACQUARIE GROUP LIMITED.
For more info SHARE ANALYSIS: MQG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Despite an ever increasing number of sceptics with respect to its business model, Macquarie Group ((MQG)) has again delivered a solid headline result, its half year profit of $604 million being broadly in line with market expectations (though those same sceptics might argue this does not take away that the result was down 43% from the same period last year).

The key for Citi, which upgraded the stock to a Buy post the result, was the released financial numbers confirmed the group continues to deliver in terms of managing the balance sheet and with respect to funding for its operations. As the broker points out, the result showed the group’s tier 1 ratio of 11% remains well above regulatory requirements, while the fact a dividend of $1.45 per share was declared is also a positive as it offers further evidence the capital position is solid.

GSJB Were has also upgraded the stock to a Buy post the result, largely as even with factoring in more conservative earnings assumptions in future years it sees value in the stock at current levels. As evidence of this the broker points out as at yesterday’s closing price the stock was trading on a price to net tangible assets of less than 1.0x in FY09. This makes the long-term risk/return profile far more supportive, though share price volatility should continue in the shorter-term in its view.

The only broker really disappointed in the profit result was Merrill Lynch, as its estimate was around 16% above the profit number the company delivered. As a result the broker has cut its earnings per share (EPS) forecasts in FY09 by 16% and in FY10 by 17% to 386c and 431c respectively. This compares to GSJB Were’s move to lift its FY09 forecast by 5% to 386.8c, while in FY10 it expects EPS of 481.6c. Consensus EPS forecasts for the group now stand at 412.5c and 455.2c according to the FNArena database.

While the shares bounced post the result JP Morgan suggests the current price still implies concerns in the market as to the viability of the group’s operating model, concerns the broker regards as unfounded. In the broker’s view the recent 12% discount to net tangible assets is simply excessive, paticularly when viewed in context of the strong funding and excess capital position.

This suggests to the broker the stock offers compelling relative value at present, though it does accept there are few obvious catalysts to drive the stock higher in the shorter-term. Credit Suisse agrees, as even while the earnings base is shrinking in the current environment the group continues to offer good leverage to earnings growth when conditions eventually improve.

Most in the market agree as the FNArena database shows the stock is rated as Buy eight times compared to a single Hold recommendation courtesy of UBS, which suggests earnings guidance for the second half is going to be difficult to achieve given currently tough operating conditions.

The average price target on the stock is $39.21, down from $41.03 prior to the half-yearly profit. Credit Suisse remains the most aggressive with its $50.00 target, while UBS is the low marker at $27.80. Macquarie Group shares have continued their post result run today and as at 1.55pm the stock was up $1.00 or 4.2% at $25.00. Over the past 12 months the stock has traded in a range of $20.08 to $82.85.

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