Company Overview: Macquarie Group Limited (ASX: MQG) is a financial services company incorporated in 2006. It provides services like asset management, retail and business banking, wealth management, leasing and asset financing, market access, and commodity trading. The company started trading on ASX in November 2007.

MQG Details

A Record Level of 3QFY22 Update: The company witnessed improved overall market conditions in 3QFY22. Robust income from Macquarie Infrastructure Corporation and higher base fees, positively impacted results during the period.

• Rise in Net Profits: Net profit on a YTD basis in FY22 increased year over year, thanks to continued volume growth in the BFS segment. During 3QFY22 and YTDFY22, Commodities and Global Markets (CGM) and Macquarie Capital's combined net profit was up year over year, primarily due to higher principal income in Macquarie Capital (which includes robust investment realisations in the infrastructure, business services and technology sectors).
• Strong Financial Position: The company’s financial position surpassed APRA’s Basel III regulatory requirements, with a Group capital surplus of $A11.5 billion at 31 December 2021, compared to $A8.4 billion as at 30 September 2021. As at 31 December 2021, Bank CET1 ratio, leverage ratio, LCR ratio and NSFR ratio stood at 12.2%, 5.1%, 177%, and 121%, respectively.
• Segmental Highlights: As at 31 December 2021, MAM had assets under management (AUM) of $A750.1 billion, up 2% on 30 September 2021. Positive impacts from market movements drove the upside. BFS had total deposits of $A91.6 billion at 31 December 2021, up 4% on 30 September 2021. Under the CGM segment, the company witnessed robust results across the commodities platform, owing to high client hedging and trading opportunities.

Financial Summary (Source: Analysis by Kalkine Group)

A Quick Look at 1HFY22 Result Highlights:

• Improved Operating Profits: For 1HFY22, the company reported a net operating income of $7,804 million, depicting a rise of 41% on pcp. The resilient results were mainly due to higher Fee and commission income, net interest, and trading income. 1HFY22 net profit came in at $2,043 million, up 107% year over year, primarily from higher contributions from all four operating groups.
• Robust International Income & Assets Under Management (AUM): During the period, international income contributed ~72% of total income. Notably, AUM stood at $737 billion during the period, up by 31% from 31 March 2021.
• Higher Employment: At 30 September 2021, MQG employed 17,209 people, up 5% on 31 March 2021. Additionally, more than 160,000 people were employed at assets managed by Macquarie and investments, an area where MQG holds significant influence.
• Capital Raising Program: MGR is seeking to raise $A1.5 billion in the form of a non-underwritten institutional placement (Placement), and a non-underwritten share purchase plan (SPP). The capital raising aid the company to improve its flexibility to invest in new opportunities, while maintaining an appropriate capital surplus.
• Liquidity Details: As at 31 March 2021, cash and bank balances stood at $A18.4 billion, up 90% year over year, primarily due to a rise in surplus cash placed on immediate deposit with the Reserve Bank of Australia (RBA).

Operating Group performance Highlights (Analysis by Kalkine Group)

Key Metrics: For 1HFY22, MGR reported loan growth of 17.7%, up from -4.3% in comparable 1HFY21.

Liquidity Profile (Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 23.38% of the total shareholding, while the top four constitute the maximum holding. Macquarie Investment Management Ltd. and The Vanguard Group, Inc. are holding a maximum stake in the company at 5.24% and 4.54%, respectively, as also highlighted in the chart below:

(Analysis by Kalkine Group)

Dividend Track Record:

The company has a decent track record of rewarding shareholders through dividends. MQG paid a 1HFY22 dividend of $A2.72 per share (40% franked), up from $A1.35 per share in 1HFY21. This signifies a pay-out ratio of 50%. The company dividend policy remains stable in a 50 to 70% annual pay-out ratio. At a CMP of $177, the company’s annual dividend yield stood at 3.25%.

Dividend History (Source: Analysis by kalkine Group)

Key Risks: The company is exposed to the risk of adverse economic conditions triggered by the COVID-19 pandemic. Further continuation of the pandemic and its adverse economic repercussions could substantially hurt its businesses as well as results and financial condition. It is also prone to increase governmental as well as regulatory scrutiny.

Outlook: MQG remains well-positioned over the medium term, owing to a diversified and adaptable mix of solid businesses, cost-saving initiatives and a conservative balance sheet. It has successfully pursued its strategy of diversifying its funding sources by growing its deposit base.

Under the MAM segment, the company expects base fees to be broadly in line in the short-term, while net other operating income is expected to be slightly down due to significant one-off items in FY21. Under BFS, the company expects higher expenses, likely to support volume growth, technology investment and increased regulatory investment. Macquarie Capital transaction activity is expected to be significantly up in 2HFY22 on a pcp basis. With substantial contribution from client and trading activity, consistent client contribution across the financial markets’ platform and continued contribution from Asset Finance, the company expects robust Commodities income. 

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 11.4% and is trading lower than the average 52-week price level band of $140.83 - $217.32, offering a decent opportunity for accumulation. The stock has been valued using the P/BV multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company might trade at a slight premium to its peers, considering rise in net profits, capital raising program, decent long-term outlook, etc. For this purpose, peers like National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), ASX Ltd (ASX: ASX) have been considered. Given the company’s track record of rewarding shareholders through dividends, decent earnings profile, robust income from home loan and business lending, current trading level and upside in the valuation, we give a “Buy’ recommendation on the stock at the current market price of $177, as of 24 February 2022, 2:30 PM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

MQG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined: 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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