Macquarie Group Ltd (MQG)

By Jason Fittler

Macquarie Group is a diversified financial services company, with business operations across corporate and asset finance, equities, fund management, banking and financial services, and FICC.

Macquarie Group established in 1969 as the Australian subsidiary of UK merchant bank Hill Samuel. In 1985, Macquarie diversified its shareholding structure, assumed its present name and obtained an Australian banking license, listing on the ASX in 1996. Macquarie Group diversifies across multiple regions, with 32% of revenue coming from Australia, 35% from the US, 20% from EMEA, and 13% from Asia.

Macquarie delivered a very strong result, taking advantage of buoyant conditions with all divisions except Equities contributing to growth.

Importantly MQG's return on equity rose to 14%. It is the first time it has well exceeded its cost of capital since the financial crisis.

We see MQG as a highly leveraged organization, heavily exposed to further AUD correction, low-interest rates, market conditions and a more appropriate compensation structure. We do not believe this operating leverage is fully appreciated by the market.

In the event market conditions continue to be strong, interest rates remain low, and MQG updates its remuneration structure, it could trade up towards $95. This would imply 2.5x book.

However, if market conditions deteriorated sharply and asset prices begin to fall, MQG could see significant pressure on its earnings with its ROE reverting significantly below its cost of capital. This could result in a reversion back towards fundamental valuation methodologies.

It is forecast to pay a gross dividend of 5.2% and although not a high as other banks the upside growth potential is more.

At the current price, the company is looking fairly valued however there is some upside potential for the company in the medium term especially if the economy recovers.

For more information about Macquarie Group Ltd (MQG) please contact us on 07 4771 4577.