By Paul Rickard

Shareholders in Macquarie have many reasons to thank Nicholas Moore and his senior leadership team for the transformation at Macquarie. So far this year, Macquarie shares have risen from $58.29 at the start, to close yesterday at $78.23, which with dividends, takes the return to 37.6%. Not bad compared to the overall market, which shows a year to date loss of 2.23%.

And if you had bought Macquarie shares in September 2011 at under $20 when the effects of the GFC were still casting a pall over investment banks and some investors were talking about Macquarie’s “break-up” value, you would be laughing all the way to the bank – like many Macquarie staff are doing again now.

This week, there was further good news for shareholders. Macquarie upgraded its outlook for FY16. Noting the impact of a weaker Australian dollar and improved trading conditions for Macquarie Asset Management and Macquarie Securities, Macquarie said that it now expects 1H16 results to be approximately 40% higher than 1H15. It also said that while lower performance fees will impact 2H16, this should still be on par with the improved first half, meaning that 2H16 will be up on 2H15. Overall, profit for FY16 will be around $1.9 billion – up almost 18% on FY15’s $1.604 billion.

The Macquarie transformation

Under Nicholas Moore, Macquarie has transformed from being an Australian focused investment bank, with a high reliance on volatile trading and capital markets income, to a globally diversified financial institution where annuity style businesses dominate. As the following chart shows, the share of operating income from annuity style businesses has risen from 23% in 2007 to 68% in 2015.

Business mix – 2007 vs 2015 (net profit contribution)

Annuity style businesses are Macquarie Asset Management, which manages $477 billion of assets and contributed 35% of net profit; Corporate and Asset Finance, which has a portfolio of $29.2 billion in corporate and real estate loans and asset financing of motor vehicles, aircraft, rail and equipment; and Banking and Financial Services (deposits, mortgages, private banking, business banking, wrap etc). Corporate and Asset Finance contributed 27% of group net profit, while the banking arm contributed 7%.

Macquarie Group – business unit contribution to net profit 2015

The once mighty Macquarie Securities Group (equity trading, broking, sales) contributed just 2% of net profit. The other capital market businesses are Commodities and Financial Markets, which contributed 20% of group net profit, and Macquarie Capital (M&A, advisory, project finance, debt and equity capital markets) which contributed 10% of net profit in FY15.
While badging some of its businesses as “annuity style” might be a slight exaggeration, for example, Macquarie Asset Management earns performance fees which are volatile, while base fees are charged on the value of FUM which varies with the market, it is all part of a campaign by Macquarie to reposition itself as a low risk, stable financial institution with predictable earnings. Further, these earnings are from across the globe, with Australian earnings making up just 30% in FY15. Of Macquarie’s 14,058 staff, 7,538, or 54%, are located outside Australia, in 28 different countries.

Income by region - 2015

Some transformation!

Too late to buy?

Macquarie’s had a great run – a quadrupling in price over four years is not bad by any measure, so this is the obvious question. The brokers don’t think so. According to FN Arena, sentiment is positive at +0.6 (scale -1.0 is most negative to +1.0 most positive), with a consensus target price of $84.73. They view guidance by Macquarie as being slightly conservative, and see opportunities on the cost side from improvements in efficiency.

Further, the metrics aren’t too bad in comparison to the broader market. Broker forecasts have Macquarie trading on a multiple of 13.8 times FY16 earnings, and 13.5 times FY17 earnings. The forecast dividend yield for FY16 is 4.7%, franked to approximately 40%.

Macquarie is of course quite leveraged to a weaker Australian dollar and strong equity markets – so if the equity markets stay flat and the Aussie dollar starts to form a base around 0.70 US cents, then the best gains may have already been had. That said, there aren’t too many other Australian companies growing net profit after tax at 18% per annum.