Macquarie rises to $200/share

With Macquarie Group (ASX: MQG) having enjoyed a surge in its share price over $200 this year the lingering question is how much further can it rally?

Many analysts rate it as a Buy, and the company’s performance on Environmental, Social, and Governance (ESG) is relatively strong, as it targets net zero carbon emissions by 2050 and plans to move to 100% renewable energy by 2025.

Like any company, Macquarie’s board and management recognises the importance of sound ESG practices “as part of their responsibility to its clients, shareholders, communities, people and the environment in which it operates”.

ESG gravitas

Macquarie Group is rated AA by one of the world’s largest ESG research houses, MSCI (ratings range from CCC to AAA).

That ESG rating is in line with the ANZ Banks (ANZ) and Commonwealth Bank’s (CBA) AA rating, and better than Westpac’s (WPL) and National Australia Bank’s (NAB) single-A rating.

According to MSCI, Macquarie is a leader among 59 companies in the investment banking and brokerage industry.

Another global ESG ratings house, Morningstar-owned Sustainalytics, also rates Macquarie Group 254 out of 1056 international banks on ESG performance and 4,856 out of 14,979 in Sustainalytics’ global universe.

Its rating considers a company’s ESG strengths and weaknesses compared its peers.

Sustainalytics’ ‘controversy rating’ notes that Macquarie Group’s business ethics, labour relations and accounting and taxation have impacted the company’s overall ESG risk rating.

Risk or opportunity?

Morningstar banking analyst Nathan Zaia says that Macquarie is exposed to some ESG risks regarding the quality of the financial products and services it offers.

For example, Macquarie is currently one of hundreds of financial institutions under investigation in Germany regarding the so-called Cum-Ex investigation.

A crackdown on a practice that allowed both shareholders and those that bought shares from a short seller to claim tax credits on the same dividend payment.

“Despite investing large sums in green projects, both within Macquarie Infrastructure and Real Assets and directly, those investments are a small part of Macquarie’s assets under management,” says Zaia.

“Investing in controversial sectors such as weapons or tobacco can lead to loss of funds under management (FUM) as awareness and consideration amongst investors increases.”

Strong fundamentals

Meantime, the financial outlook for Macquarie is strong and it is rated highly by analysts, with a consensus Overweight rating, according to a survey of 13 stockbrokers by the Wall Street Journal (WSJ); six rate it as a Buy, two recommend an Overweight rating (up from four three months ago) while four recommend investors Hold.

The median target price on the stock is $214, while $174.28 is the lowest forecast and $245 is the highest, according to the WSJ survey.

Macquarie last traded at $198.75. Zaia says the narrow-moat stock is expensive; he puts its fair value of $148.

While Macquarie is in a sound capital position, Zaia notes impairments in asset financing and lending businesses, as well as on its own equity investments are a potential risk in weaker economic conditions.

Macquarie’s first-half FY22 result was impressive, with all divisions doing better than Morningstar expected. Cash profit of $2bn is flat on second half FY21 and up 107% on first half FY21.

“We back Macquarie to continue to generate strong returns on investments, grow its assets under management and customer base,” says Zaia.

“Timing of asset realisation and market conditions can create lumpiness in earnings, we forecast midcycle returns well above Macquarie’s cost of capital.”