Morgan Stanley slaps $240 price target on Macquarie

For investors juggling the transition from conventional to renewable energy, Macquarie may offer the best of both worlds.

The US investment bank’s ‘bull case’ share price target for Macquarie is $388. Picture: Bloomberg

For investors juggling the transition from conventional to renewable energy, Macquarie may offer the best of both worlds.

Morgan Stanley analysts boosted their target on Macquarie by a massive 37 per cent to $240 a share on Friday and reiterated their overweight rating as they calibrated the investment case for its leverage to green energy opportunities.

The target price increase drove a 3.7 per cent rise in Macquarie’s share price to a record high of $189.56. Macquarie shares are still 27 per cent below the target, and an incredible 105 per cent below the US investment bank’s “bull case” of $388 a share.

With a resurgence of demand as well as supply disruptions sparking a global energy crisis which has boosted crude oil prices to seven-year highs and coal and gas prices to 13-year highs, and takeover activity sparking a rebound in energy companies after a period of undervaluation compounded by environmental considerations, energy has been the strongest sector on the local market recently.

The ASX 200 Energy sector is up 11 per cent since June versus 0.7 per cent for the market.

With gas prices remaining volatile, Macquarie’s Commodities and Global Markets division may again benefit from “favourable market conditions” which contributed a stronger than expected second half performance, potentially giving upside to current guidance for first half earnings “slightly down” compared to the second half.

Macquarie is due to report on October 29.

But whereas environmental concerns now prevent many funds from investing in conventional sources of energy, Macquarie has potentially the world’s best green capabilities among financials. “We think this will bring faster earnings growth versus peers and Macquarie should command a green premium multiple,” Morgan Stanley said.

The investment bank has “green capabilities and renewables alignment” throughout, with Macquarie Capital/Green Investment Group as a renewables developer, Macquarie Infra-structure and Real Assets as an infrastructure operator, and Commodities & Global Markets as an energy trader.

“We think Macquarie’s combination of capabilities is unique among Australian financials and also global private markets peers because it can offer holistic or turnkey renewables solutions, backed by an almost 20-year track record,” the analysts said.

While acknowledging Macquarie was becoming more capital intensive they saw this as a deliberate choice by company’s management to take advantage of a “multi-decade structural tailwind in renewables”.

Meanwhile, Macquarie’s payout ratio and dividend yield remain competitive.

The International Energy Agency’s pathway to achieve net zero by 2050 requires a combination of significant government and private sector spending plus a shift in consumer behaviour.

Its sustainable development scenario needs solar and wind investment to rise 65 per cent to $US400bn ($555bn) of annual investment between 2025 and 2030, and investment in renewable power will need to rise 106 per cent to $US600bn in 2025-30.

“While the bears would point to CGM’s involvement with oil and gas, it’s important to note both types of energy will be required for several decades to meet global demand – renewables can’t come on quickly enough,” the Morgan Stanley analysts said.

Conventional energy producers and users need to adapt to a renewable future, and as Macquarie clients they can be introduced to the broader group for capital solutions, renewables development, and operational expertise.

“Macquarie’s renewable operations and clients could generate excess renewable energy, which conventional energy producers may seek to improve their carbon footprint,” Morgan Stanley said.

“Some clients may need to trade carbon offsets – or in the US, some need to trade Renewable Identification Number credits. CGM can provide a global trading and hedging platform to help energy clients.

“So, while renewables and carbon offset trading is small for now, it should grow rapidly from this low base.”