Stock of the Day – Macquarie Group Limited (EXPENSIVE)
Macquarie Group Limited (MQG) is engaged in proffering banking, financial, advisory, investment and funds management services across the world. Its service umbrella also includes catering to financial advisers, mortgage brokers etc. on wealth management. MQG operates in Asia Pacific, America, Europe, Middle East and Africa, with headquarter in Australia. It aims to expand further – For instance, expansion to Singapore is one of the current undertakings. The business strings extend to Macquarie Funds Group, Corporate and Asset Finance, Banking and Financial Services Group, Macquarie Securities Group, Macquarie Capital, and Fixed Income, Currencies and Commodities.
2014 Annual Review (Source – Company Reports)
As per MQG’s FY15 guidance, higher performance fees indicated a fair outcome. Though low transaction volumes provided some turbulence. The guidance more or less looks to be a little up from FY14. Further, the earnings for 1H15 may be up from that of 1H14. The Group expects that 1H15 result will be up by ~25-30% on 1H14, down on 2H14; and 2H15 result will be moderately up on 1H15. While the guidance for other divisions remain the same, the Funds Group guidance has been indicated to be now “up on FY14” compared with earlier thought “in-line” guidance with FY14. Cyclical M&A may also be of significance to the results. For example, MQG has formed a number of strategic alliances (collaboration with CanadianForex, Advanced Markets, LLC, and so forth) for a wide-spread market penetration.
The key driver for the fair results has been, primarily, the performance fees from listed funds as well as Macquarie Infrastructure Funding 1 (MEIF 1) which has sold 5 assets out of the 8 assets. MEIF 1 specifically sold down stakes in APRR (French toll roads) and Arlanda Express (Stockholm airport connection). Selling the portfolio over the next 1-2 years may be of further benefit to MQG. Nonetheless, the performance fees from MEIF 1 in 1H15 is likely to be a small component contributing to the total.
Funding Structure (Source – Company Reports)
Coming to the banking arm of MQG, we note that the new $400m Macquarie Bank Capital Notes (MBLPA) offer investors another well priced new Additional Tier 1 hybrid security. This offer appears to be threaded with a partially franked dividend which may grab investors’ attention in terms of seeking a greater cash dividend income.
In terms of the risks, factors which may influence the growth constitute weak capital market activities, market share loss/gains in overseas operations, and low investor confidence. The cost reduction programs and lower staff compensation ratios may though look appealing to some.
The subdued markets volatility is a concern for us with respect to securities and FICC trading revenues. Foreign exchange, MQG’s conservative approach to funding and capital, potential regulatory changes and tax uncertainties also pose a threat. Further, MQG’s involvement in legal issues looks to be little taxing. For instance, the Australian Securities and Investments Commission (ASIC) has lodged for proceedings against Macquarie in the Federal Court. Then Basel III Norms on Capital Requirements for banks may also tend to exert some pressure on MQG’s banking arm.
Daily Trading Profit and Loss (Source – Company Reports)
We feel that improved business conditions, corporate activity and continuing strength in IPO markets, coupled with good capital base and diversified product portfolio may help achieve a fruitful result sometime down the line for MQG. However and as mentioned earlier, MQG’s performance is subject to recovery in global investment markets for further upside.
Accordingly, we believe that the stock is EXPENSIVE at the current price of $57.31 and would review it at a later date as appropriate.
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