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Macquarie's earnings upgrade boosts analyst outlook

Lex Hall  |  26 Nov 2018Text size  Decrease  Increase  |  
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Macquarie is set for impressive earnings growth, says Morningstar, which has increased its fair value estimate for the global diversified financial services group to $135.

Morningstar analyst David Ellis says the narrow-moat company continues to show the strength of its diversified yet interconnected business units with the strong first-half 2019 performance and a second earnings upgrade in two weeks.

"We are more convinced the global leader in infrastructure asset management and renewable energy is well placed to generate impressive earnings growth," said Ellis, following a meeting with Macquarie management earlier this month.

"Based on the stronger earnings outlook, we increase our fair value estimate 4 per cent to $135 a share, with our fiscal 2019 forecast profit increasing to $3 billion from $2.7 billion previously."

Macquarie Group earnings fair value investment bank

Macquarie's moat rating has been upgraded from 'none' to 'narrow'

At 11am Sydney time, the stock was undervalued, trading at $113.94 - about 16 per cent lower than the upgraded fair value estimate.

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Ellis forecasts the dividend increasing to $6.20 a share in fiscal 2019, 45 per cent franked, based on a 70 per cent payout, in the middle of the 60-80 per cent target range.

Macquarie provided a brief upgrade to fiscal 2019 earnings following the sale in late August of Quadrant Energy to Santos. The Australian oil and gas company was jointly owned by the investment bank, alongside Brookfield Business Partners, but Macquarie and Brookfield flagged the discovery of the Dorado well offshore Western Australia as a good time to sell.

Macquarie's fiscal 2019 earnings guidance reflects the $130 million post-tax profit from the sale of its 21.8 per cent stake in Quadrant.

"Updated guidance now targets an increase in fiscal 2019 earnings of up to 15 per cent compared with previous guidance of an approximate 10 per cent increase in profit," Ellis said.

There is "clear evidence", Ellis says, of improved operating conditions for Macquarie following strong financial results between fiscal 2014 and 2018.

"We still expect earnings growth to benefit from favourable market conditions, such as stronger equity markets, a lower Australian dollar, increased fund inflow, and increased capital-markets activity," Ellis said.

"New IPOs, increased merger and acquisition activity, the positive reaction from equity markets to expected changes in US interest rates, and further positive signs for the US economy support investor confidence and bode well for Macquarie's market-facing businesses."

Ellis has also upgraded Macquarie's moat rating from "none" to "narrow" - an indication of its growing competitive advantage.

The company has five global business divisions - Macquarie asset management; corporate and asset finance; banking and financial services; Macquarie capital; and commodities and global markets.

Ellis cites the "interconnectedness" of these divisions as key to continued strong growth in total shareholder returns.

However, he notes there are risks and uncertainty to keep in mind, chiefly the prospect of a downturn in global markets.

"Near-term issues include uncertainty in global investment markets and a relapse in the tentative global economic recovery.

"Our near-term forecasts will suffer if the market recovery fails."

Despite the challenges, Ellis believes Macquarie’s diverse and evolving business model positions the group to deliver solid earnings growth in the medium- to long-term.


Bulls say:

  • Macquarie is a growth-focused, niche global investment bank with the reputation for highly motivated and incentivised staff and astute management
  • Strong balance sheet supported by excess capital and places Macquarie in a strong position to take advantage of distressed asset sales
  • International expansion in funds management produces sustainable, lower-risk, annuity-style income. There is significant upside from the market-facing businesses when markets hit their straps
  • Diversification and interlinking are key to generating long-term revenue growth for global diversified financial services firm

Bears say:

  • Investment banking growth is dependent on favourable market conditions, and deterioration in global markets will again pressure earnings. Our near-term forecasts will suffer if the market recovery fails
  • Complexity and lack of transparency, particularly in the investment banking business, have been issues in the past, although management reporting is improving in this regard
  • Near-term issues include uncertainty in global investment markets and a relapse in the tentative global economic recovery. A collapse in global capital markets would reduce transactional activity such as mergers and acquisitions, IPOs, capital raisings, and other corporate activity


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is senior editor for Morningstar Australia

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