Don’t get carried away by Macquarie, analysts say

Sarah Thompson, Anthony MacDonald and Gretchen Friemann

Investment bankers across the market love keeping an eye on Macquarie Group as an indicator of sentiment across the industry.

Monday’s earnings update saw Macquarie shares jump 2.9 per cent, after Macquarie lifted profit expectations towards above consensus estimates of $1.19 billion.

Analysts on Tuesday morning were warning everyone not to get too carried away. Macquarie’s bullish statement was driven by its fixed income, currencies and commodities business, where this year’s volumes do not necessarily mean next year will be better too.

Below is a summary of what sell-side analysts said in their morning notes.

JPMorgan, neutral, $50.46 price target

“Numerically, a 40%-45% uplift in earnings relative to the A$851m recorded as at FY13, implies a guidance range of A$1,191m to A$1,234m. We note, consensus before today’s update was at the bottom end of this guidance range at A$1,191m,

“Attention now turns to FY15 earnings, and the extent to which performance fees from MIRA unlisted funds, increased deal activity and strong growth in domestic mortgages can potentially provide positive EPS revisions and a further re-rating to MQG’s share price.”

Morgan Stanley, equal-weight, price target increased to $55.90 from $52.20.

“The majority of today’s upgrade emanated from FICC, where conditions improved further in late 4Q14E. While this is consistent with an improving cycle, we’re reluctant to capitalize this pick-up given volatility in FICC revenues.

“So while we lift our FY14 FICC estimate, we conservatively leave our FY15 FICC forecast unchanged. The latter still implies a strong ~34% growth in FICC earnings.”

UBS, neutral, $52 price target

“We see metals, energy and agriculture as key areas of expertise for MQG. We now expect FICC Trading revenue to hit a record ~$1,300m in FY14E. [To put this into perspective, this compares to combined global revenue from Macquarie Capital (IBD) & Securities (Equities) of ~$1,600m.]

“FICC Trading revenue is now expected to be approximately 11% above its previous highs delivered in FY10 & FY13. However, given the volatile trading nature of these businesses it is risky to extrapolate this good performance to future periods. As a result, our forecasts for FY15E and outer years are broadly unchanged.”

Credit Suisse, outperform, $63 price target

“We see MQG’s modest earnings guidance upgrade as positive, and see upside risk to the actual FY14E earnings outcome noting: 1) precedent historically for MQG’s “approximate” earnings guidance to vary from stated numbers (a possibility which MQG covers off in its guidance caveats); and 2) scope for general asset price inflation to both moderate the quantum of MQG’s FY14E impairments and also enhance MEC and MCG realised gains (which are historically skewed to second half reporting periods).

“MQG currently trades on 13.8x 12-month prospective earnings and a book multiple of 1.5x (global peer group 0.6x-1.4x).”

Deutsche Bank, hold, price target increased to $57 from $56

“Despite poor FICC earnings for global IB’s in Q1, MQG has bucked the trend by reporting stronger FICC earnings driven by their overweight position in commodities.

“This upgrade will help support the share price leading into the FY14 result, however the real upside to consensus and the share price exists in FY15 and FY16 from MEIF performance fees and improved market conditions.

“Whilst we are moving closer to these benefits emerging we believe we are still a little early to factor these benefits into the share price with some uncertainty on timing and magnitude of these events.”

The Australian Financial Review