Stock Report | Macquarie Group Limited

Macquarie Group Limited (ASX: MQG)

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INVESTMENT SUMMARY

  • On an upgrade cycle with earnings growth guidance lifted to 15% for FY19.
  • Banking Royal Commission will have a minimal impact on MQG, yet it has been devalued with domestic retail banks.
  • Payouts an attractive sustainably growing yield.

Ticker | ASX:MQG
GICS Sector | Financials
Current Price | A$109.57
12m Target Price |  A$130.00
Upside | 18.6%
Market Cap | A$35,509m
P/E | 12.5x
Div Yield | 5.5%


BUSINESS DESCRIPTION

Macquarie Group Limited provides diversified financial services globally. It operates in five segments: Macquarie Asset Management, Corporate and Asset Finance, Banking and Financial Services, Commodities and Global Markets, and Macquarie Capital. The company was founded in December 1969 and is headquartered in Sydney, Australia.


INVESTMENT THESIS

On an Upgrade Cycle with a Strong Track Record

Macquarie upgraded FY19 earnings guidance from 10% to 15% growth on 16 November 2018 following ACCC approval for selling its 21.8% stake in Quadrant Energy to Santos Limited. Given management has a target payout ratio of 60-80%, we now estimate the full year dividend could be up to $6.00 per share. This would imply a forward yield of 5.5% which we believe is cheap for a cyclical company with multiple years of double-digit dividend growth.

Oversold on Banking Royal Commission Fears

The banking royal commission primarily scrutinised financial advice and retail banking arms, which make up a small percentage of group sales for Macquarie. Additionally, Macquarie avoided intense scrutiny during the Banking Royal Commission. Instead, the outgoing Macquarie CEO, Nicholas Moore, only faced very brief questioning. Thus, we believe the market has unjustly sold off Macquarie which is down 15% from its 52-week highs.


CATALYSTS

Reinvestment and Rotation of Capital into Macquarie

Over the next fortnight, Macquarie and retail banks will payout dividends which investors may look to reinvest. Given that Macquarie is an incredibly attractive alternative to the retail banks, we expect dividends and capital to be redirected into Macquarie.

Progress Towards a Resolution in the US and China Trade War

Markets have been sold off on the uncertainty surrounding the outcome of the trade disputes between the US and China. Any progress towards a resolution would ease concerns and drive a rebound in markets. Given Macquarie is more sensitive to market risk, we expect it to outperform the market when the market trends upwards on positive global news.


VALUATION & PEER COMPARISON

Relative Valuation

Macquarie trades at only a small premium to retail banks, particularly CBA, which is unjustified given that the retail banks are significantly more exposed to the headwinds of the Banking Royal Commission and decline in residential property prices. Macquarie also experiences double-digit growth whilst the retail banks only grow at around the rate of inflation.

Our target price of $130 is in line with consensus and assumes a forward PE of 15x which is within one standard deviation of its 1-year historical average. Our valuation assumes that Macquarie should be trading at a relatively higher premium than retail banking peers.


INVESTMENT RISKS

Key risks include market risk, a material deterioration in economic conditions and pre-emptive tightening of monetary policy.


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