The market was slow to factor downside risks from the coronavirus (COVID-19) into the share price of Macquarie Group, but Ord Minnett notes the stock has recently come under considerable pressure and arguably has now overshot the fundamentals. The peak-to-trough fall the share price over the past weeks pales in comparison to the GFC, but it is on par with the 2001–02 tech wreck correction. We don’t see the risks as fundamentally as great as during the GFC, with Macquarie’s capital, funding and liquidity metrics all vastly better today and mark-to-market risks that are far lower. Our house view has also become more positive on risk assets.
These risks have led us to make further cuts to our EPS forecasts, although the recent share price levels present a strong buying opportunity. We cannot dismiss further risks, such as a market double-dip, damage to corporate activity or commodity prices remaining depressed, but the extraordinary support being offered by governments should ensure the coming recession is short and sharp.
We have reduced our cash EPS forecasts by 7% in FY20, 17% in FY21 and 4% in FY22, reflecting higher loan and investment impairments and lower gains on asset sales. Our operating expense forecasts have been reduced by 1% in FY20, and 4% in FY21 and FY22 to reflect lower compensation expenses, as we assume some modest reduction in headcount in 1H21 and a smaller bonus pool to absorb the revenue hits.
Our dividend forecasts have been lowered by more than our earnings reductions to ensure Macquarie has a sufficient capital surplus, including to take advantage of any opportunities provided by market dislocation.
With the company’s key infrastructure business likely to soldier on, we see an attractive risk-reward equation. We recently upgraded our recommendation to Buy from Hold, while our target price has fallen to $112.00 from $132.00 due to changes to our earnings forecasts.