Macquarie Earnings: The Hangover After a Record Year Is Expected to Pass

Narrow-moat Macquarie’s MQG first-half fiscal 2024 profit of AUD 1.4 billion and short-term guidance prompts a 5% reduction in our fiscal 2024 forecast to AUD 3.8 billion. The key culprit is lower investment income as a result of fewer asset realizations. We expect a much stronger second half, with management commentary giving us comfort it has profitable assets in the pipeline to be sold soon that have strong buyer interest.

Income from asset realizations can be lumpy, but we expect Macquarie’s expertise in infrastructure and renewable energy will see the firm achieve adequate returns on its investments over time. The other key driver behind the anticipated 27% fall in profit from the fiscal 2023 record, is that last year benefited from strong client and hedging activity, particularly in gas, oil, and resources given heightened volatility and price fluctuations over the year.

Our AUD 175 fair value for Macquarie is unchanged with our post-2024 forecasts largely unchanged. While the first-half result was soft, illustrated in our view by the 9% annualized ROE compared with 17% in fiscal 2023 and a 5-year average of 16%, we expect earnings growth will see an improvement to an average ROE of 13.5% over the next five years. We think it is reasonable to assume a lower return to historical averages given historical gains benefited from rising asset values as global cash rates fell.

After the drop in fiscal 2024, we forecast Macquarie can grow EPS by 8.5% per year. Global expertise and reputation continue to lead to growth in assets under management, profits on asset realizations—helped by operational performance improvements and lending opportunities. Even though commodities and global markets are expected to cool from fiscal 2023 levels, adding products and entering new regions continues to provide a base for earnings to grow again.

We think Macquarie is undervalued trading on a forward P/E of 16.5 and partially franked dividend yield of 4.2% based on our revised forecasts.