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Stock of the Day - Macquarie Bank (Expensive)

Macquarie Group Limited (MQG) has recently updated its FY15 outlook. The revised outlook appears to be steered by volatility in energy markets. Factors such as deal activities and AUD movements along with volatility boost have led MQG expecting to have 10%-20% growth in FY15 as opposed to the consensus earnings growth of 9%. Since the 1H15 results, a reduction of 49% in the oil price and 30% in the gas price has led to increased energy price volatility, which seems to have resulted in some profits. Better market conditions in foreign exchange and capital are expected to have contributed as well. The enhanced currency volatility has led to FICC earnings. In fact, market believes that currency may have accounted for only ~1%-3% of the FY15 guidance upgrade. Volatility across bonds, oil and hard commodities appear to particularly benefit the Energy Trading, MEC (Metals & Energy Capital) and MAST (Metals & Agriculture Sales & Trading) businesses. These businesses may contribute to about half of MQG’s revenue in FY16E. It is also important to note that these businesses generate ~85% of revenue outside Australia providing leverage to any further drop in AUD. All-in-all, the recent volatility may create more client flow and trading opportunities, as sensed by the market.


Financial Summary (Source – Company Reports)

MQG has also witnessed good rise in deal activity in Australia and in foreign parts in Q4 of CY14. This is further noted to be on a continual front. A very recent example entails announcement to acquire 49.89% stake in EnBW Baltic 2 wind farm from EnBW Energie Baden-Wurttemberg by Macquarie Capital. Earlier reported results have also been promising otherwise. During the second fiscal quarter of 2015, sales at Macquarie Group Limited totaled A$5.97 billion, indicating a rise of 16.1% from A$5.14 billion in sales during the second quarter of 2014.

However, it is important to consider that the above-specified drivers such as volatility factor etc., may only yield short-term results given the market conditions. In fact, the Group itself had stated that its short-term outlook is subject to a range of uncertainties including market conditions; impact of foreign exchange; cost of continued conservative approach to funding and capital; and potential regulatory changes and tax uncertainties.


Cash Dividend per Share (Source – Company Reports)

It is also hard to assess the effect of falling energy prices on FICC given that MQG seeks to hedge-out most of the market risk with regards to energy prices. MQG has also cautioned about the revised guidance being subject to period end reviews, i.e., impact of potential FICC write-downs may look little hazy. In other words, dipping commodities prices may lead to higher write-downs in oil and gas equity investments and impairments in the oil and gas loan book, depending on the exposure extent. While expectations such as a better outcome from Corporate & Asset Finance is to be seen on one hand, we are also wary of the fluctuating commodity cycle on the other. Concerns revolve around commodity related impairment charges considering MQG holding ~A$400m of equity and ~A$2.5bn of lending related exposure. It is also noted that ~A$200m of impairment charges have been taken during FY14. Other aspects to be closely viewed relate to US Energy trading profits during January and February 2015 and the extent of performance fees.


Reported Net Profit after Tax and Basic Earnings per Share (Source – Company Reports)

We expect that haziness will fade away to some extent during the operational briefing scheduled on 17 February 2015 with updates/ reaffirmation of the 2015 guidance.



Based on the above, we believe that the stock is still EXPENSIVE at the current price of $61.55 and we will review it on a later date.