Macquarie pleases

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expensive-cognac

Credit Suisse on MQG:

MQG reported 1H14 Reported Profit of $501mn (up 39% on $361mn pcp) which was 2% better than our $492mn estimate and guidance for earnings “broadly in line” with 2H13 ($490mn). Interim DPS of $1.00, 40% franked (up 33% on $0.75 pcp) was short of our $1.16 estimate; proposed distribution also of one SYD security per MQG share. Refer detailed financials attached. FY14E guidance reiterated for operating group contribution profit “up” on FY13 (ex the impact of the SYD distribution $377mn gain on distribution) but with CAF guidance upgraded and FICC guidance downgraded within this. Compositionally, Capital and FICC were softer than expected; Funds and Securities marginally stronger.

Investment Case: Whist earnings comfortably met guidance, the proposed SYD distribution is a substantial and welcome capital management initiative, which should be well received. What we liked about the result: 1) Additional capital management initiative in the proposed SYD distribution; 2) Further gradual earnings recovery in Securities (reference to improved ECM but subdued M&A) with both brokerage and equity trading income reviving; What we didn’t like: 1) FICC earnings again marred by MEC equity investment impairments, with the net revenue line item credit, interest rates and FX perhaps in our view containing loss making items; 2) Cost to income ratio still elevated / 6% sequential cost growth and 2% FTE increase; comp expense ratio marginally declined.

Valuation: MQG currently trades on 14.8x 12-month prospective earnings and a book multiple of 1.5x (global peer group 0.6x-1.3x).

Very expensive!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.