Macquarie Group posted FY17 cash earnings of $2.217 billion, up 7% on a year ago and 6% above Ord Minnett’s forecast, driven by a lower-than-expected compensation ratio and effective tax rate. The final dividend of $2.80 per share was above our $2.50 estimate and represents a FY17 payout ratio of 72%.
Given the operating leverage in this business, carrying through this run rate from this result leads us to lift our FY18 estimate by circa 10% to $2.3 billion, with a commensurate increase in our price target to $87 from $80. We maintain our Hold recommendation on Macquarie.
The remainder of the FY17 result was within our expectations, with a lower run rate of performance fees offset by ongoing strong levels of asset realisation and reductions in impairments and provisions.
Looking ahead, the maturity of unlisted funds, such as Macquarie European Infrastructure Fund 2 (MEIF2) with €4.6 billion and Macquarie Infrastructure Partners (MIP) with US$4 billion will see base fees stall and limited opportunities for performance fees given that they were raised in 2006.
They will, however, provide opportunity for ongoing high levels of asset realisation gains and transaction fees to support Macquarie’s FY18 guidance of being “broadly in line” with FY17.