Silver Donut Still Shining
Macquarie Group delivered a strong first-half FY19 result with a cash net profit of $1.31bn, a 5% increase on the same period last year and 6% ahead of Ord Minnett’s forecast driven by a trading performance that was well ahead of our estimate.
The commodities and global markets (CGM) division had a very strong half, rising 85% on a year ago driven by the commodities product line. This performance will be difficult to repeat, although there does tend to be seasonal strength for a number of CGM’s products in the second half and conditions in the energy market remain robust.
In addition, both CGM and Macquarie Capital have seen a 60% increase in their capital allocation in recent years, which suggests the market-facing businesses are likely to be strong for some time.
We expect the second half to benefit from gains on sale and performance fees from Energetics (completed), Quadrant Energy (announced but yet to be completed) and Brussels Airport, the final asset in Macquarie European Infrastructure Fund (MEIF) I and III. Macquarie Industrial Trust (MIP) I and MEIF II could also pay performance fees at some stage, as previous commentary suggested they were close to hitting their hurdle rates of return.
FY19 net profit guidance was lifted from “broadly in line” to 10% above FY18. We note this has come much earlier in the year than normal, reflecting confidence in the outlook. Given Macquarie has typically given fairly conservative guidance in the past, we see this as an encouraging sign and it gives us confidence that it can produce a strong second half. Guidance specifically excludes any contribution from the sale of Quadrant Energy, which is yet to be completed. We also see potential for a PEXA sale to be completed in the period.
We recently raised our FY19–21 net profit forecasts by 7–9%, largely reflecting the strength in CGM earnings which we expect to persist given the supportive commodities environment and recent acquisitions. This led us to upgrade our recommendation to Accumulate from Hold and raise our target price to $132 from $117.