Macquarie Group’s third-quarter FY19 trading update and operational briefing were positive overall, and we note the following key points:
- Macquarie Infrastructure and Real Assets (MIRA) equity under management (EUM*) rose 10% in the quarter due to substantial fundraising activity in Europe – MIRA typically earns its base fee revenue on EUM rather than assets under management (AUM);
- Significant principal realisations came through, as expected.
- The North American Power & Gas business continued its strong performance, albeit tailing off late in the quarter.
- There was a weaker performance from the equity markets business.
- Softer equity markets in December affected assets AUM growth, although markets have snapped back since 31 December.
Management reiterated guidance for FY19 net profit to be “up to 15%” above FY18, and highlighted positive trends and long-term opportunities for the investment bank and asset manager.
The operational rundown highlighted long-term opportunities across multiple regions. Management appears to be diligently filling in capability gaps while retaining the group’s niche approach. Offshore expansion is not without risk, but Macquarie has a good track record on execution and we expect this to continue.
Our cash earnings forecasts have increased 1% in FY19 and FY20, and 2% in FY21. We now expect net profit growth of 16% in FY19.
We believe Macquarie Group is well positioned in the global investment banking and diversified financials sector, supported by its market positioning in key niches – such as commodities, infrastructure, and green energy – and strong attention to risk management. In addition, the contribution to revenue from volatile income streams, including performance fees and gains on sale, do not appear to be above historical levels. Given these factors and our belief that Macquarie is likely to exceed FY19 earnings guidance again, we maintain our Accumulate recommendation and have raised our target price to $133.00 from $132.00.
* For MIRA’s listed funds, EUM is defined as market capitalisation plus fully underwritten or committed future capital raisings. For unlisted funds, EUM is defined as committed capital less any called capital returned to investors.