This week’s pick tends to divide opinion; some love it and some hate it. The company is Australia’s leading investment bank, Macquarie Group. It was founded in 1969 as Hill Samuel Australia, employs over 15,000 people and according to its website, it has delivered a profit over 50 consecutive years.
Macquarie was one of the companies most impacted by the GFC, with its 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 per cent) and more market-based or transactional income (40 per cent).
Management has adjusted by diversifying into asset management (39 per cent of earnings), which has doubled to $550 billion, and entering the traditional banking and financial services sector (13 per cent). 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 $134 billion 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 per cent) and Macquarie Capital (Mac Cap), which delivers just 8 per cent of earnings through capital raisings and advisory.
MQG’s most recent report is irrelevant today. The company delivered a profit of $1.45 billion, which was a 13 per cent fall on the previous half and 11 per cent growth on the previous year.
This was supported by 32 per cent growth in asset management ($1.12 billion in revenue), 2 per cent growth in Banking ($385 million), a 32 per cent rise in Commodities and Global Markets ($1.14 billion) and a 56 per cent fall in Macquarie Capital to $223 million.
MQG’s core asset management business, which represents 40 per cent of earnings, is split about 60 per cent to fixed income and 40 per cent to equity, which while positive in the current environment, is likely to see a 10 per cent reduction based on recent volatility.
Looking forward, analysts are forecasting a reduction in profit of as much as 25 per cent in the wake of 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 two player.
The recent weakness and uncertainty around the implications of COVID-19, in our view, offer an opportunity to initiate a holding in this high-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, and this experience has since been transitioned into the renewable energy sector.
The global infrastructure spend required before 2025 is approximately $5 trillion, while the EU expects to spend $688 billion 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 per cent) 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 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 per cent dividend yield, plus 40 per cent franking, which has been increased consistently since 2012: while 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.