Macquarie Group reported a higher-than-expected fiscal 2017 Profit of AUD 2.2 billion, 3% above our forecast and 4% above consensus, primarily due to a lower tax rate. Nevertheless, the result was impressive building on the 29% growth in NPAT achieved in fiscal 2016. Despite the 7% increase in NPAT beating guidance of “broadly in line with FY16”, the 18% increase in the total dividend to AUD 4.70 per share, 45% franked, surprised. The dividend was 9% higher than our forecast but the 72% payout remains within the firm’s 60%-80% target range. The second-half performance also impressed with NPAT of AUD 1.17 billion up 11% on first half. Our fiscal 2018 earnings forecast is upgraded 4% to AUD 2.37 billion. Similar increases are made to outer year forecasts. We raise our fair value estimate 4% to AUD 93. We like Macquarie’s earnings outlook and business momentum, but at current prices, the stock represents fair value.

We maintain our positive view on the internationally focused asset manager and advisory business. Longer term, Macquarie is well-placed to leverage the surge in demand for global infrastructure as it is a world leader in sourcing, investing, and or managing major critical infrastructure and real assets. Guidance was typically vague with CEO Nicholas Moore confirming fiscal 2018 group profit is expected to be broadly in line with fiscal 2017, subject to the usual caveats including market conditions, currency movements and potential regulatory and tax uncertainties. Some investors mistakenly believe Macquarie is a high risk global investment bank, with memories of the profit and share price collapse during the GFC. But Macquarie has again reinvented itself during the past several years into a top 50 global asset manager. Despite our positive view, key risks include weaker capital markets activity, lower profits or losses on asset disposals, increased impairments, non repeat of performance fees and reputational damage from potential management missteps.

Looking forward, we are confident of further solid earnings growth underpinned by a strong balance sheet, surplus capital, a robust liquidity and funding profile and conservative risk management. The 6% increase in EPS to AUD 6.58 beat our forecast and drove the return on equity to an impressive 15.2%, up from 14.7% a year ago, and comfortably above our assumed 11.0% cost of equity.

Analysts: David Ellis and Ravi Reddy

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