Is Macquarie Group now looking materially oversold?

With the unceremonious share price tumble from over $200 late April to $1.55 having tested Macquarie Group’s (ASX; MQG) moniker as a ‘quality blue-chip for all seasons’, investors will be looking to the group’s half year results on 28 October for clues that the bank cum-infrastructure company has been materially oversold.

While Macquarie is typically seen as a bank, the group’s diversified operations, which at 31 March 2022 had around $400bn in total assets, encompasses everything from real estate, financial institutions, energy, commodities, resources, renewables and infrastructure.

While two of the group’s four operations Macquarie Asset Management (MAM) – part of the group’s annuity-style business - and Macquarie Capital are heavily invested in infrastructure, deciphering what each entity is invested in and what returns are derived from these investments isn't easy.

However, based on net profit as a percentage of reportable assets, MAM is clearly a standout performer having delivered double-digit returns over five year and 20%-plus over the last three.

Material tightening

However, as monetary conditions tighten, Citi, which rates Macquarie Neutral, argues that changes to the macroeconomic environment – responsible for delivering big near-term gains - could start to undermine future years' earnings.

Supported by energy market dislocation, Citi expects gains on sales and commodities to be key earnings drivers for Macquarie. But despite a falling A$ being offset by lower assets under management, the broker suspects deal-linked revenue is exposed to a material tightening amid ongoing volatility. 

Given that 48% of the group’s net operating income in FY22 was derived from the Americas, and another 7% from Asia, Macquarie has clearly benefitted from the strength of the US$.

However, the broker notes the flight to the safe-haven US$, spurred by US rates, has been a material headwind to asset prices.

As a case in point, unhedged bonds are down about -20% on a 12-month basis, while equity markets are down around -15-30% over 12 months.

Fixed income & equities

While deciphering infrastructure valuations is tough at the best of times, Citi warns that fixed income and equities alone [mark-to-market] could see MAM’s total assets under management fall by around -15%.

The broker reminds investors that while only half of total assets under management (AUM) is located in the Americas and Asia, they represent around 74% of total income.

The net effect concludes Citi is a smaller pool of earnings to translate back from a stronger US$.

The -20-30% fall in first quarter 2022 M&A activity also spells a corresponding fall in fund transactions.

"… with equity and debt funding materially more expensive, this puts IB (investment banking) advisory and DCM & ECM revenues under pressure,” the broker notes.

While Citi is forecasting net profit after tax (NPAT) for the first half at $2.4bn versus consensus of $2.2bn, the broker expects a sharper drop-off in second half FY23 with forecast earnings of $1.7bn to underperform consensus $2.1bn.

While Citi has the second lowest price target on Macquarie of $172 per share, this still represents an 11% discount to today’s price.

What other brokers think

Consensus on Macquarie is Moderate Buy.

Based on Morningstar’s fair value of $191.99 the stock appears to be undervalued.

Based on the six brokers that cover Macquarie (as reported on by FN Arena) the stock is currently trading with 23.6% upside to the target price of $192.50.

Early August UBS upgraded Macquarie to Buy from Neutral having concluded that the group is better positioned to attract mortgages due to having the most competitive refinancing SVR rate among the top seven banks.

Target price falls to $185.00 from $200.00.

Morgan Stanley recently upgraded its FY23 commodity revenues (based on the 1H alone) by 10% due to ongoing high levels for US gas prices and retains an overweight rating and $231 target price.

Macquarie Group share price over 12 months.