EUR 850.00 For Business Accounts Only

Morningstar | Macquarie Group's Business Units' Interconnectivity Is Underappreciated. FVE Increased to AUD 130. See Updated Analyst Note from 18 Jul 2018

Diversification and interlinking are key to generating long-term revenue growth for global diversified financial services firm, Macquarie Group Limited. The extent of interconnectivity between the five groups and operating leverage provides attractive earnings upside we think the market underappreciates. We like Macquarie's growth profile, long-standing senior management, long-term investment approach, and upside from exposure to infrastructure, energy, and technology sectors. We see the interconnectedness of Macquarie's adjacent businesses as a real competitive advantage and key to continued strong growth in shareholder returns. Macquarie is a world-leading infrastructure fund manager and has increasing exposure to renewable energy, putting it in a good position to benefit from huge growth in global infrastructure and energy investment in the next decade.

The OECD forecasts a total of USD 41 trillion in global transport infrastructure investment is needed by 2030, and a further USD 11 trillion in electricity generation and distribution. The investment need is immense with the OECD estimating an annual average spend of USD 2.7 trillion and USD 700 billion, respectively.

The combination of stronger near-term earnings and a more positive medium-term outlook sees our fair value estimate increase 7% to AUD 130 per share. We forecast attractive annual average EPS growth of 8% in the fiscal 2019-23 period, based on growing global need for investment in infrastructure and energy markets, robust global capital markets, and ongoing institutional demand for Macquarie's mainly unlisted alternative infrastructure funds. At current prices, the stock is broadly fairly valued, trading 5% below our valuation, but nonetheless provides a reasonable exposure point to the long-term growth opportunities in global infrastructure and energy sectors. The stock currently trades on a P/E of 15.6 and offers a 4.5% dividend yield, which compare favourably to global peers.

We recently updated Macquarie's moat rating to narrow, based on the competitive advantages of its underlying businesses. The asset management and corporate finance businesses benefit from customer switching costs and brand strength, while the investment banking businesses benefit from network effects and brand strength. The banking business is the only business we don't consider moat worthy.

A track record of impressive stewardship of shareholder capital over many years results in the increase in our stewardship rating to Exemplary from Standard. Strong shareholder returns, decade-long conservative capital management, a robust risk management structure, executive expertise, and a dynamic, entrepreneurial attitude are trademark Macquarie characteristics and support our Exemplary stewardship rating. Shortcomings in capital management stewardship last occurred during the GFC when Macquarie incurred impairments of AUD 1.9 billion in fiscal 2009 due to large exposures to highly geared satellite investments and on-balance sheet equity investments.

Macquarie is well-placed to leverage improving global economic growth and buoyant capital markets with the group's diversified mix of businesses delivering solid organic growth supported by small- to medium-size acquisitions. Macquarie benefits from the ongoing trend of capital concentration in the global infrastructure and energy industries, with market leaders like Macquarie raising increasingly large amounts of equity to fund growing investment in infrastructure and energy assets.

The International Monetary Fund currently projects world GDP growth to average 3.8% per year from 2018 to 2023 inclusive. The beauty of Macquarie's business model is not just leverage to global growth but the way the group is particularly exposed to the global policy move from monetary policy stimulus, including quantitative easing, to the massive expected ramp-up in public-private infrastructure investment. Building, buying, funding, advising, and managing critical infrastructure assets are the group's key skills, particularly for Macquarie Capital and Macquarie Asset Management. The firm's track record in the global infrastructure asset sector puts it in a strong position to benefit from the long-term increase in public-private infrastructure stimulus.