Macquarie: Interim result 2014
Recommendation
Macquarie Group has posted an encouraging interim result, but merger and acquisition activity remains subdued. Operating income for the six months to 30 September (Macquarie has a March year end) increased 20% from a year earlier to $3.7bn, with operating expenses increasing 13% to $2.9bn. Net profit increased 39% to $501m, but was up just 2% on the previous six months. Earnings per share increased 42% to $1.50 and an interim dividend of $1.00 was declared (franked to 40%, estimated ex date 12 Nov), up from $0.75 unfranked.
The annuity-style businesses (Macquarie Funds Group, Corporate and Asset Finance and Banking and Financial Services) increased their combined profit by 24% to $1bn. Increasing assets under management from $347bn to $385bn helped increase fees, in turn increasing Macquarie Funds’ profit 40% to $500m.
The Corporate Finance division also increased profit by 18% to $396m, with the division’s asset and loan portfolio increasing 10% to $25bn, chiefly due to growth in motor vehicle leasing and favourable currency movements. Macquarie’s mortgage book also increased 26% to $15bn, or just 1% of the market, as it competes more aggressively with Australia’s retail banks.
The market-facing businesses (Macquarie Securities, Macquarie Capital and Fixed Income, Currencies and Commodities) produced a combined profit of $375m, up from around $150m a year earlier, but down 25% from the previous six months. Corporate activity remains subdued and Macquarie was hurt by poor performing investments in resources companies, but it’s still winning its fair share of big deals.
Sydney Airport distribution
Subject to approval at a shareholder meeting on 12 December, Macquarie also expects to divest its $1.4bn stake in Sydney Airport on 13 January 2014 to shareholders by distributing one Sydney Airport stapled security for each Macquarie ordinary share held (the date that the stock will go ex-distribution is still unknown). Provided it’s approved, the company’s share buyback will be cancelled to preserve its regulatory capital surplus.
‘The meeting will also consider a consolidation of Macquarie shares on a 0.9438-for-one basis to adjust for the capital reduction. This will facilitate greater comparability of share prices and financial metrics before and after the distribution. A share sale facility will be established for small and ineligible shareholders.'
Overall Macquarie expects an improvement on 2013 for the full year subject to the usual caveats and currently trades on a forecast price-to-earnings ratio of 16. The price-to-book ratio of 1.5 looks low by historical standards but the super profits earned prior to the GFC are like your youthful good looks, once lost they’re gone forever.
We’re prepared to give the company a little more latitude as things are heading in the right direction, but it’s difficult to gauge whether the market-facing businesses can significantly improve their performance and the investment case. The stock price has increased 8% since Three stocks to gain from more M&A from 20 Sep 13 (Hold – $50.14) and we’re sticking with HOLD.
Note: The model Growth Portfolio owns shares in Macquarie Group.