Date : 11/09/2020

Macquarie Group Limited

ASX :

MQG

Market Cap : $42.06 Billion

Dividend Per Share : $0.72

Dividend Yield : 3.41 %

Hold

52 Week Range : $70.45 - $152.35

Share Price : $126.10

MQG is a stock that is backed by past performance of the firm. However, given the market uncertainties and economic crisis, we issue a “Hold” recommendation.

Company Analysis

Macquarie Group Limited (MQG) is a juggernaut of the Australian financial sector. MQG operates through the below segments predominantly in Australia & New Zealand, USA, Europe, and EMEA

  • Asset Management
  • Banking & Financial Services
  • Commodities & Global Markets
  • Macquarie Capital.

The Sydney based giant is in the top 10 Australian companies’ group, boasts of a diversified business that is exposed to 31 markets globally, and to have been profitable for the last 51 years.

Company Updates


Source: Tradingview.com

Macquarie’s stock was hit hard during the crisis in March. The stock was trading at all-time highs of $152.35 prior to the meltdown on the back of a good performance in FY2019. The group even saw its credit rating be upgraded by S&P in December last year. Since the meltdown, the stock has recovered quite a bit of the losses incurred and is currently trading at $126.10.

MQG seeks growth opportunities in Asia as the demand for asset management is expected to be high as the emerging markets are forecasted to grow and eventually over-take the OECD this decade.

Macquarie’s revenues are diversified across the segments it operates under and by geographical location.
The firm is less exposed to Australia and NZ that the other big 4 banks it usually gets compared to. However, Macquarie is mainly into investment banking services. The firm generates only 17% of its revenues from retail banking and financial services, which is in contrast to the big 4.

We have sliced their revenues by operational segments and diced it by geographical location to understand the diversification of the firm’s revenue generation as per the data from FY2020 report.

Industry Analysis

The investment banking industry is in its mature stage. It is forecasted to grow at an annualised growth rate of 1.6% through to 2025.

The economic crisis induced by the novel coronavirus has impacted every industry, but more so industries that are debt heavy and highly capital intensive. Retail banks and investment banks fall into the category of adversely impacted as is the case with every financial crisis. Banks act as the first line of defence for financial markets as they have to deal with high levels of debt that may have to be written off, and highly capital-intensive activities.

This crisis has been no different. The operating models of these retail and investment banks have to be revisited and focussed towards acceleration of digital transformation, and the future of work.

Non-performing assets will definitely be a burden that we will see the impacts in the next annual report. The impact of these assets and high debt levels will only increase if the pandemic recovery halts as more businesses and consumers will be affected. Sectorial changes such as mergers & acquisitions, restructuring of organisations will only increase the longer the economy is affected by the pandemic.

Banks in Australia, much like the rest of the developed markets were already adjusting to low interest rates, reduced business activities. The level of competition in the investment banking space is high which might affect how quickly banks will recover once demand bounces back.

The industry is forecasted to see a growth in demand as the effects of the pandemic reduces. The confidence in high growth around developing economies is especially high at this stage, and Macquarie is well positioned to take advantage of that as it has significant presence in Asia, EMEA, and the USA.

Investment Thesis

MQG posted revenues of $12.3 Billion and net income of $2.7 Billion, a reduction of 2% and 8.4% from FY2019, respectively. Past performance charts tell us a story of a firm with stable revenues, expenses.

MQG follows a financial year reporting standard of April-March every year. The report at the end of March 2020, therefore, will not reflect the impact of the pandemic on its balance sheet. Commodity and Global Markets, and Asset Management make up about 66% of the total revenue generated by MQG. The impacts of the pandemic on this are currently not clear. Trading activity would have significantly reduced due to the higher levels of volatility in the global markets. Hedging strategies to limit downside will usually be in play – which means, limits on upside potential as well.

The cash levels have decreased since 2018 due to the rise in investments and M&A deals as the firm seeks growth. Currently, the cash balance sits at $7.4 billion. MQG’s assets stand at $255.8 billion, and liabilities at $234 billion – both saw a significant increase from FY2019. These numbers are strong relative to its industry and MQF’s past levels. However, maintaining industry standards does not mean protection from an economic crisis. This crisis has already punished capital intensive and debt laden businesses. The net loans have seen a growth of 21% over past year. This is quite concerning given the uncertain economy we are in now.

MQG most recent dividend was 180 cents for every share at a dividend yield of 3.41%. These dividends are 40% franked. The 40% franking is due to the firm operating out of offshore banking units with different tax rates, as is the case with every asset management firm.

The return on assets has had quite significant drop off, while the return on equity has seen a marginal decrease. We believe this has occurred because of the significant increase in assets in FY2020.

Recommendation

MQG comes with a history of stable performance and long-term health that maintains industry norms. The dividends are an attraction as well. MQG has growth prospects once demand rebounds – especially in Asia. However, the current economic situation and market volatilities are a cause for concern. The longer the crisis goes on, the harsher maybe the impact on debt heavy firms as its non-performance assets and defaults increases. Hence, we issue a “Hold” recommendation for now.

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