Macquarie: Interim result 2016 and SPP

You might have thought that after upgrading their first-half profit guidance three times – most recently after the period end – Macquarie Group management could have got it right. A cynic would perhaps say they did, with first-half net profit coming in 2% ahead of the final upgrade – well, you wouldn't want anyone to be disappointed, would you?

It's hard to imagine anyone was, with the pre-tax profit rising 44% to $1.6bn thanks to a 24% rise in operating income, to $5.3bn, combined with only a 17% rise in expenses, to $3.7bn, and a healthy dose of operational leverage.

A slightly lower tax rate saw net profit rise 58% to $1.07bn, while an increased share count meant that earnings per share rose 'only' 53% to $3.25. Compared to the second half of the 2015 financial year, though, earnings per share rose a less remarkable 13%.

Basking in glory

The return on equity was particularly striking at 15.8%, up from 12.5% a year ago. The other main highlight was Asset Management, which basked in the glory of being named in the Top 50 global asset managers by increasing its pre-tax profits by 45% to $1.1bn.

The $503bn Macquarie now manages (up 18% since a year ago) now dwarfs the likes of Perpetual, which has a mere $28bn, but not all funds are created equal. More than half Macquarie's funds under management (FUM) comes from relatively low margin fixed income and direct infrastructure, with only $72bn in equities. As a result, the operating income of $1,669m (up 36%) represents only about 0.34% of average assets under management, compared to 0.74% for Perpetual and 1.31% for Platinum Asset Management. And the operating income was swelled in the latest half by $609m of performance fees (up 63%). Without these, the margin would fall to 0.21%. Still, it is, as they say, nice work if you can get it.

The other major 'annuity-style' business – Corporate and Asset Finance – is also hitting its straps, with its operating income rising 25% to $863m and its pre-tax profits increasing 31% to $611m. Operating lease income saw a particularly sharp jump, of 31% to $363m, following the purchase of 90 leased aircraft in March. There should be another big jump in the current half, following the purchase of the Esanda vehicle finance business from ANZ.

The smallest of the three annuity-style businesses, Banking and Financial Services, was not to be left out, with its pre-tax profits rising 21% to $170m thanks to a 17% rise in platform and other commission and fee income.

The star performer among the market-facing businesses was Macquarie Securities, which increased its pre-tax profits from $17m to $240m thanks mainly to 'improved trading opportunities in Asia and Europe driven by increased market volatility, particularly in China, as well as increased demand for Asian retail derivatives'. So it looks like we weren't the only ones to take advantage of the recent market ructions.

Macquarie Capital and Commodities and Financial Markets both increased their pre-tax profit by 13% from the same period last year, to $170m and $282m respectively, although both were down from the second half of 2015, in which they were boosted by significant items.

SPP attractive

Details of the share purchase plan (SPP) announced alongside the Esanda acquisition were also revealed, and shareholders should be getting booklets in the post this week. Those on the register on 7 October will be entitled to apply for up to $10,000 worth of shares, although if you also participated in the March SPP, you'll be limited to a total of $15,000 between the two.

The price will be $78.40, being the $80 paid in the institutional raising less the $1.60 first-half dividend, for which the ex date is next Monday, 9 Nov, and to which the new shares will not be entitled.

The offer closes at 5pm on Tuesday 17 Nov and assuming the stock remains at a premium to the issue price, then it will make sense to participate, perhaps selling other Macquarie shares on the market to provide funds, subject to your own personal tax situation.

Guidance for the second half was officially maintained as 'up on FY15', with a second half that's lower than the first but higher than the second half of 2015. Given that first-half profit beat guidance by $20m, though, the guidance for the full year has really risen slightly, from a range of about $1,980m–$2,100m to $2,000–$2,120m. No doubt, though, management really expects to do a bit better than this (all things being equal) and such is the danger of encouraging that expectation, look out if they don't.

Still, at the top of that range, earnings per share will amount to about $6.10 based on the expanded share count. After deducting the interim dividend, the stock is up 5% since Macquarie buys Esanda and upgrades again on 8 Oct 15 (Hold – $77.84), putting it on a price-earnings ratio of about 13.5 and about twice the tangible book value per share of $40.30. That looks about right, and we're nudging up our Buy price from $60 to $65 and our Sell price from $90 to $100. HOLD.