Some love it and some hate it, Australia’s leading investment bank Macquarie Group Ltd (ASX: MQG).
Macquarie was founded in 1969 as Hill Samuel Australia, employs over 15,000 people and according to their website delivered a profit in 50 consecutive years. Macquarie was one of the companies most impacted by the GFC, with their high fee, internal investment model placed under incredible pressure amid a global credit crisis.
The company has since transformed into a combination of annuity-style asset management income (60%) and more market-based or transactional income (40%).
Management has adjusted by diversifying into asset management (39% of earnings), which has doubled to $550bn and entering the traditional banking and financial services sector (13%). These businesses are less capital intensive, have more controllable cost structures and ensure the ongoing strength of the company’s balance sheet.
Macquarie is renowned as a global leader in traditional infrastructure investment through Macquarie Infrastructure and Real Assets (MIRA), managing some $134bn for institutions, and in the financing and management of renewable energy projects.
The transactional business is spread across Specialised and Asset Finance, Commodity and other trading (32%) and Macquarie Capital (Mac Cap) which delivers just 8% of earnings through capital raisings and advisory.
MQG’s most recent report is irrelevant today. The company delivered a profit of $1.45bn, which was a 13% fall on the previous half and 11% growth on the previous year.
This was supported by 32% growth in asset management ($1.12bn in revenue), 2% growth in Banking ($385m), a 32% rise in Commodities and Global Markets ($1.14bn) and a 56% fall in Macquarie Capital to $223m. MQG’s core asset management business, which represents 40% of earnings is split around 60% to fixed income and 40% to equity, which whilst positive in the current environment is likely to see a c10% reduction based on recent volatility.
Looking forward, analysts are forecasting a reduction in profit by as much as 25% due to the COVID-19 outbreak due to the impacts on the sale of major assets and subsequent performance fee triggers, lower asset management fees, higher loan impairments and potentially less investment banking activities. That being said, some weakness will be offset by the impending flow of capital raisings in Australia, where Macquarie is the number 2.
The recent weakness and uncertainty around the implications of COVID-19, in our view offer an opportunity to initiate a holding in this quality company. MQG has identified a niche in the operation, financing and running of infrastructure assets which it has grown organically to become a global leader, this experience has since been transitioned into the Renewable Energy sector.
Global infrastructure spending required before 2025 is approximately $5tn, whilst the EU expects to spend $688bn on its renewable energy transition per year, highlighting the opportunity.
The company’s expansion into traditional banking and finance, including home loans, offers further diversification (15%) of income, particularly when funded through the bank’s Cash Management Accounts which are used by investors across the country. MQG is utilizing its more flexible position to offer a faster turnaround on home loan approvals and introducing new technology that is seeing it gain market share from the majors; something I can vouch for following recent first-hand experience.
MQG offers a 5.9% dividend yield, plus 40% franking, which has been increased consistently since 2012 and whilst this may come under pressure in 2020-21 due to a slowdown in performance fees as COVID-19 begins to bite, we are confident that this has already been addressed in the share price fall.