Macquarie Group held its 2019 AGM, where management announced the group had made a solid start to the year with 1Q20 net profit broadly in line with a year ago. Ord Minnett notes, however, that this outcome was delivered due to stronger-than-expected commodities conditions, which are expected to tail off over the remainder of the year. This view has led us to maintain our Hold recommendation, although we have raised our target price to $134.00 from $130.00.
Our new target price is only modestly above the share price and, at an FY20E price-earnings ratio of around 15x, we view Macquarie’s valuation as fair to full. We acknowledge falling bond yields and strong equity markets are both positive thematics for the asset manager and investment group, but we do not see the risk/reward equation as attractive enough at this point to become more positive.
Macquarie’s 1Q20 result was said to be in line with that of a year ago, and slightly down quarter-on-quarter. Combined net profit from Macquarie’s annuity-style businesses was down the same period last year, while its markets-facing businesses were slightly higher aided by strong commodity trading conditions. We estimate currency alone could have added 3–4% to earnings in the first quarter, although this driver will diminish (from a growth-on-year-ago perspective) through the year.
Macquarie noted a continuation of strong market conditions in commodities that had propelled its FY19 result, albeit this is not expected to continue. The division benefited from strong contributions from client hedging trading opportunities, particularly from Global Oil, North American Gas & Power and EMEA Gas & Power businesses.
The recent share price appreciation reflects risk-on market sentiment and declining long bond yields. After the FY19 result, Macquarie traded weakly before rallying more recently as central banks globally became more dovish. This is not surprising given Macquarie’s significant holdings of infrastructure assets – through its Macquarie Infrastructure and Real Assets (MIRA) funds and directly – as well as the support that firmer markets provide to base fees and asset realisations.
Our FY20-22 net profit forecasts have lifted by less than 1% with increases in base, performance and M&A fees more than offsetting reductions in equities trading income and gains on sale. We now forecast FY20 net profit will be flat on FY19, which is at the top end of the range implied by guidance.