MACQUARIE (MQG) – Earnings calm after storm

Macquarie Group Limited (MQG) is a global financial services group operating in 34 markets in asset management, retail and business banking, wealth management, leasing and asset financing, market access, commodity trading, renewables development, specialist advisory, capital raising and principal investment. Macquarie's FY24 profit fell 32% to $3.5 billion, missing our forecast by 7%. The largest division, commodities and global markets, recorded a 47% fall in profit following stellar years in FY22 and FY23.  Volatility in gas, oil, and resources prices drove strong client hedging and trading activity. The division's $3.2 billion profit is still well up on the FY21 profit of $2.6 billion. Adding products and entering new regions provides a base for earnings growth.  The bigger miss to our forecasts came in asset management, with profit tanking 48% to $1.2 billion, despite 7% growth in assets under management. Asset management fees were flat, with fewer asset sales compared with last year, the key contributor to earnings weakness. Demand from investors for its assets remains strong, however, with $22 billion in new equity raised. Post the result, we increased our fair value estimate by 6% to $185 per share based on the time value of money and a modest increase to profit growth longer-term.  Our FY25 profit forecast is lowered 9% on a smaller earnings contribution from asset sales and implies earnings growth of around 16%. Management's short-term guidance by division suggests a return to earnings growth in FY25 but it is vague and contingent on market conditions.  Our longer-term forecasts imply a mid-cycle return on equity of around 14%. After the drop in FY24 and recognising that asset sales create lumpiness, we forecast Macquarie can increase earnings per share by 9% per year.

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