Macquarie draws mixed reviews, interim profit a ‘pleasant surprise’

Macquarie Group’s sharply lower interim profit of $985m has drawn mixed reviews.

Macquarie’s lower interim profit was higher than expectations. Picture: Bloomberg

Macquarie Group’s sharply lower interim profit of $985m has drawn mixed reviews, with investors upgrading price targets after a result that was higher than revised expectations and the company’s guidance.

The downside, however, was that the profit relied more on gains from capital recycling and performance fees, as opposed to recurring revenue.

“Revenue, before impairments, of $6bn, down just 7.5 per cent, was a pleasant surprise,” Citi said in a note. “But the difficult conditions are set to continue with weak transaction-related revenue, and now a lack of market volatility hampering revenue opportunities.”

Last Friday, Macquarie reported a 32.4 per cent slump in profit to $985m for the six months to September, down from $1.46bn a year ago. Chief executive Shemara Wikramanayake said the group was approaching the global pandemic in a similar way to the aftermath of the financial crisis, scouting for medium-term buying opportunities with a $9bn war chest.

“For now we are giving our businesses the backing in terms of funding, capital and empowerment and they are all actively looking in places where they think there should be opportunity,” she said. “When the financial crisis happened it wasn’t immediately that the opportunities came up; we had to spend a lot of time reaching out, looking, finding the right things.”

Ms Wikramanayake referred to Macquarie’s key purchase of US asset manager Delaware Investments in August 2009 and the purchase of an aircraft leasing portfolio the following year.

While Macquarie has been linked over the past couple of years to a takeover of AMP, the CEO refused to comment on any interest in the stressed wealth group. She also declined to provide any annual earnings guidance.

The group’s shares edged up a further 99¢ on Monday to $136.44, after rallying 2.3 per cent on Friday.

Analysts were united in their view that earnings would be sustained in the second half through an initial public offering of 50 per cent of the Nuix technology group, delivering a $700m revenue boost. The remaining shares were expected to be escrowed and held at cost, then sold down over the following one to two years.

Citi said Macquarie’s capital was continuing to build as assets were sold, the dividend was constrained, and deployment opportunities were thin on the ground.

As capital rose, return on equity fell to 9.5 per cent.

A further analyst note said COVID-19 had had an impact on deal activity, especially in mergers and acquisitions and larger transactions.

Macquarie, though, was in the fortunate position of holding attractive assets in cybersecurity, financial technology, green energy and infrastructure. “We expect these asset classes to be well bid and expect significant capital recycling over coming years, driving an improvement in Macquarie Capital’s result from its loss-making position,” the report said.

JP Morgan, which kept its overweight recommendation and increased its June 2021 price from $130 to $144, said that some of Macquarie’s operating divisions faced challenges but the group’s medium to long-term prospects were sound.

Among other things, Macquarie would benefit from a “normalisation” in loan and investment impairments, a pick-up in deal activity, and deployment of surplus capital into organic or acquisition opportunities. “Looking beyond the 2021 financial year, we remain positive on its outlook,” the rival investment bank said.