Are the glory days (and share price gains) behind Macquarie?

On Friday, Macquarie Group (ASX: MQG) released its full year results for FY24. As with any results releases, the initial market reaction can provide an insight into what the market was thinking heading into the release. The 2.2% decline in Macquarie’s share price on a day when the rest of the market was up over half a percent, implies it wasn’t a completely clean sheet.

The day after a major company releases their results, comes the broker research reports. These can have an even bigger impact on a company’s share price as clients buy and sell accordingly, and the financial media disseminate ratings and price target changes.

The price discovery process grinds on!

Here’s the lowdown on the key developments at Macquarie so you can make a better-informed decision on the company’s results, how its operations are tracking, and most importantly – what the biggest brokers in the land think about it (including a consensus rating and price target).

As a bonus, I thought I’d throw in my two cents and do a technical analysis reader as well – stay tuned for this at the end.

FY23 glory days but a distant memory…

FY24 was always going to be a bit of a come-down year for Macquarie. Unlike the other Aussie banks, Macquarie is far from plain vanilla deposits and loans. It’s primarily an investment bank, that is, it takes positions on the future direction of financial markets, acts as an adviser and broker to facilitate other investors doing the same, and it also invests aggressively in strategic assets.

This can be a double-edged sword. It’s great to have all these strings to your bow when markets are booming, both in terms of inflating asset prices, but also in terms of volatility. Brokers benefit when prices move up and down – the more the better – because plenty of volatility means plenty of advice to dispense and plenty of trades to broker.

This was FY23, it was an absolute cracker – particularly for Macquarie’s Commodities and Global Markets (CGM) business. A year ago, as stock, bond, and commodities markets melted both up and down – CGM delivered a stomping 54% increase in profits to over $6 billion. Compare this to Macquarie's total FY23 net profit of $5.182 billion, and the benefits of being a broker when markets are going ballistic are clear.

Markets have settled down considerably since. FY24 was never expected to emulate FY23’s performance. So, when we look at some of the stats below, like a 32% fall in net profit, it sounds a great deal worse than one would usually expect. “Expect” is the key word here – the market was expecting a lower profit, it was just a matter of whether Macquarie could beat those lowered expectations. That’s what this article is all about!

Key takeaways from Macquarie’s FY24 results:

• FY24 net profit $3,522 million -32% (but H2 profit was up 49% on H1)

• Segment net profit contributions:

• Macquarie Asset Management (MAM) -48%
• Banking and Financial Services (BFS) +3%
• CGM -47%
• Macquarie Capital +31%
• Assets under management (AUM) $938 billion +7%
• Capital ratio comfortably above minimum requirements (surplus $10.7 billion, CET1 ratio 13.6%)
• Return on equity (ROE) 10.8% vs 16.9% in FY23 (H2 annualised ROE 12.9%)
• Dividend $3.85 per share (40% franked) vs FY24 ordinary dividend of $6.40 per share (40% franked) (payout ratio unchanged at 70%)
• Share buyback: $644 million of $2 billion purchased so far

What the brokers thought about Macquarie’s FY24 result

Goldman Sachs

Rating: OVERWEIGHT; Price Target: $178.74⬇️ vs $186.38

• Results 1% above broker’s expectations, but questions quality given contribution of lower tax rates compared to underlying strength in revenues
• Lowers FY25/FY26/FY27E earnings per share (EPS) forecasts by -5.0%/-4.0%/-5.2% due to revenue downgrades, higher expenses
• FY25 P/E ratio of 17 times is approximately 15% above the 15 year average of 14.4 times “offering very little potential total shareholder return against our revised target price”
• Green investments will drive a normalisation in investment-related income

Jefferies

Rating: BUY; Price Target: $210⬆️ vs $205

• FY24 is likely to be a trough year as markets stabilise and financial activity improves on the back of a return to stability in interest rates.
• Notes very strong capital position, this creates a significant opportunity for investments in private markets
• Macquarie’s focus on digitalisation and infrastructure will help drive future growth

Morgan Stanley

Rating: OVERWEIGHT; Price Target: $215⬇️ vs $225

• Broker notes slower than expected recovery in Macquarie Capital warrants caution with respect to short-term earnings
• Lower compensation ratio is a positive as it should help improve operating leverage
• Challenges remain from elevated interest rate volatility
• Broker appreciates Macquarie’s exposure to improving global M&A trends

JP Morgan

Rating: OVERWEIGHT; Price Target: $205⬆️ vs $195

• Results were overly assisted by write-back provisions
• Short term performance may be impacted by slower than anticipated asset realisation gains
• Short term weakness in ROE is transitory, should continue to recover in the medium term
• Broker notes that commodities income is still a key earnings driver

UBS

Rating: NEUTRAL; Price Target: $200⬆️ vs $185

• Broker notes higher costs, particularly with respect to compliance will likely be a drag on long-term ROE
• Suggests Macquarie’s strong capital position and share buyback will underpin investor appetite for company’s shares
• Notes significant potential for asset realisations in the Private Markets business
• Macquarie is well placed to manage both sector-level and macroeconomic challenges

Macquarie broker consensus

Based upon the above individual ratings and price target, let’s calculate a broker consensus for Macquarie. I like to assign a value of 0 to any rating better equivalent to a HOLD/NEUTRAL, a +1 to any rating better, and a -1 to any ratings worse. If the average rating is +0.5 or greater, I call the consensus rating a BUY, and if the average rating is -0.5 or worse, I call it a sell.

On this basis, Macquarie’s average score is +0.6 giving it a consensus rating of BUY.

The price target is a little easier. The average price target for Macquarie among the brokers sampled is $201.75, slightly up from the average price target of $199.28 prior to the March quarter update. If you prefer, Macquarie’s median price target rose to $205 from $195.

Based upon Macquarie’s price at the time of writing of $183.60, this implies a 9.9% upside to the brokers’ average price target, and a 11.7% upside to their median price target.

What the chart says about Macquarie’s demand-supply dynamics

The first thing that strikes me about the Macquarie chart is its precarious position at the long term uptrend ribbon. This ribbon tends to offer dynamic support on the way up, and a close below it can precipitate deeper declines (as discussed below).

To be fair, several white candles at the long term trend ribbon prior to Friday’s sell off appeared to indicate this. But, Friday’s long black candle and low close indicates a sudden and significant influx of supply that has overwhelmed demand (or additionally, demand evaporated!).

The candles are crucial from here. Demand-side candles, that is, those with white bodies and or downward pointing shadows would indicate investors are viewing the current pullback as a buying opportunity.

With this in mind, today’s white candle and downward pointing shadow towards support at 180.40 is promising. But! Remember candle analysis on live candles is foolhardy – we must see this positivity maintained at the close!

Outside of the current battle at the long term uptrend ribbon, I note the short term trend is down and the short term trend ribbon has been doing a fine job of impeding rallies.

The 24 April candle peaking at 191.43 is now the clear key point of supply. It must be overcome to demonstrate a return to demand-side control.

Until then, there’s little reason to do much here as the price waivers around the long term uptrend ribbon. A close below it, and below the 180.01-180.40 support zone would officially neutralise the long term trend.

If this occurs, watch for signs the long term trend ribbon is beginning to offer dynamic resistance – this would trigger a new long term downtrend which could target previous demand points around $170.

This article first appeared on Market Index on Monday 6 May 2024.