Narrow-moat Macquarie (ASX: MQG) posted first-quarter fiscal 2025 profit broadly in line with the previous corresponding period and is tracking with management’s expectations. The May outlook statement stands, adding profit from asset realizations will be weighted to the second half. Rising construction costs could result in lower returns on some renewable projects, but it appears Macquarie is happy to hold on to assets for longer to either add value in development or hold off for the right price.

Asset management base fees are guided to be flat in fiscal 2025, but other income is to be significantly higher on asset sales. Macquarie Capital similarly is expected to report significantly higher income for fiscal 2025 as it makes returns on its own deployed capital. On this front, Macquarie deployed $600 million across digital infrastructure and technology sectors in the quarter.

The asset management and banking and financial services businesses are benefiting from volume growth and cost savings, but timing of performance fees and margin compression in the bank weighed on profit in the quarter. The home and business loan books increased 4% and 5% in the June 2024 quarter, up 13% and 18% on 12 months prior. We don’t expect Macquarie to continue to expand as fast over the medium term, as the bank focuses on holding margins on its larger loan book to improve returns.

We maintain our fair value estimate of $185 per share and the shares are currently trading in a range we consider to be fairly valued. We forecast net profit growth of around 15% in fiscal 2025. Management's short-term guidance by division suggests a return to earnings growth in fiscal 2025 but is vague and contingent on market conditions. After the drop in fiscal 2024 and recognizing asset sales create lumpiness, we forecast Macquarie can increase earnings per share by 9% per year over the next five years. Global expertise and reputation are expected to increase assets under management and profit on asset realizations helped by operational performance improvements and lending opportunities.

Business strategy and outlook

Macquarie Group is a global asset manager which spent decades branching out from its Australian investment banking roots. Asset management provides more recurring revenue streams compared with transactional based investment banking, but still carries volatility as base management fees are tied to underlying asset values--primarily fixed income, equities, and infrastructure assets.

Macquarie Asset Management is global asset manager with over AUD 900 billion of assets under management. Specialist capabilities in infrastructure and property management set Macquarie apart from most peers and has been a key source of growth. With established capabilities and investment records, the large asset managers in the space continue to garner the bulk of inflows into the category.

The United States is expected to spend trillions on infrastructure over the next decade, addressing ageing transportation, electricity, schools, and airports. The European Investment Bank has backed over EUR 220 billion of green financing in recent years, with its objective to support EUR 1 trillion this decade. More broadly, Oxford economics estimates over USD 90 trillion of infrastructure investment is required globally by 2040.

Macquarie retains a targeted approach across its investment banking business, not actively seeking to take global players head on. In the Americas and EMEA, Macquarie holds less than 2% share. Macquarie continues to leverage its global expertise and reputation in infrastructure and energy to focus on deals in these markets, with success in the smaller end of the market sometimes underserviced by larger investment banks. It is also more active in advising the private equity space.

The banking and financial services division includes a retail bank (around 5% of Australian home loans) and wealth platform. We expect Macquarie’s strategy to invest in technology to improve both the customer experience and the banks' credit approval processes will continue to deliver above-market loan growth.

Macquarie bulls say:

  • Macquarie’s position as the largest infrastructure asset manager globally leaves the firm well placed to benefit from underlying demand for assets and investors searching for maintainable income streams.
  • The expansion into funds management has produced more maintainable, less capital intensive, annuity-style income, which will prevent a GFC-like shock to earnings and return on equity.
  • A focus on niche segments of investment banking allows Macquarie to continue to increase earnings globally.

Macquarie bears say:

  • Without the support of falling cash rates it is unlikely Macquarie can continue to achieve as high returns in infrastructure, resulting in lower performance fee income.
  • Macquarie invests directly in unlisted assets and businesses, and despite being diversified, a large bankruptcy or asset write-down would still have an impact on group profits.
  • A large investment portfolio makes it more difficult for investors to track and identify issues early.

Terms used in this article

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.

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