“Buy” Rating for Macquarie Group: Solid Earnings and Strategic Growth

Key Takeaways We’re issuing our “Buy” recommendation for Macquarie Group due to its solid, diversified business model and strong financial position. Despite challenges in the commodity markets, Macquarie’s asset management and banking businesses are performing well, with the asset management segment’s assets under management (AUM) reaching $942.7 billion by December 2024. Its international operations, which account for 65% of its total income, provide a cushion against regional volatility. Macquarie also reported a capital surplus of $8.5 billion, giving it the flexibility to pursue growth opportunities and return value to shareholders through dividends and its $2 billion share buyback program. With these strong fundamentals and solid growth prospects, we believe Macquarie is a great investment for both income and long-term gains. — Macquarie Group Limited (ASX: MQG) continues to impress with its diverse range of businesses. From asset management and banking to wealth management, commodities trading, and renewable energy, Macquarie is spread across four main segments: Macquarie Asset Management (MAM), Banking and Financial Services (BFS), Commodities and Global Markets (CGM), and Macquarie Capital. These segments are designed to generate steady income while driving growth, providing investors a solid mix of stability and potential upside. In the first half of FY25, Macquarie posted a net profit of $1.61 billion, marking a 14% increase from FY24. A large part of this success comes from their annuity-style businesses, with MAM’s assets under management (AUM) hitting $916.8 billion, up 3% from the previous year. This growth was driven by strong market conditions and steady inflows into private markets. Additionally, MAM’s performance fees surged by 68%, contributing to a profit boost of $684 million. BFS also had a solid showing, delivering a net profit of $650 million, thanks to growth in deposits and loans. A Diversified Business Model for Resilience What sets Macquarie apart is its ability to navigate market fluctuations, thanks to its diversified business model. While markets-facing businesses like CGM faced headwinds due to weaker commodity markets in FY25, they still maintained solid capital positions. Despite these challenges, Macquarie’s international businesses accounted for 65% of its total income, which shows how their global footprint helps drive growth. The CGM segment, despite the volatility, saw strong results in foreign exchange, financial markets, and asset financing. This combination of cyclical and non-cyclical income streams gives Macquarie added resilience when markets are tough. Strong Capital Position and Ongoing Growth We’re also impressed by Macquarie’s capital management. As of December 2024, the company reported a capital surplus of $8.5 billion, which is well above regulatory requirements. This surplus gives Macquarie the flexibility to pursue new growth opportunities and return value to shareholders. The group’s CET1 ratio stands at 12.6%, and its Leverage Ratio is at 5.0%, meaning it’s in a strong position to weather future challenges. On top of that, Macquarie is running an on-market share buyback program of up to $2 billion, which we believe will help boost shareholder value. Dividends Continue to Grow: Macquarie remains committed to returning capital to shareholders. Its 1H25 dividend of $2.60 per share represents a 5% increase from the previous year, and with a payout ratio of 61%, it reflects their ongoing commitment to delivering steady income. Their policy of returning 50-70% of earnings to shareholders annually shows that they’re focused on providing consistent returns. With its diversified business model, strong capital position, and consistent performance, we see Macquarie as a solid long-term investment. The company’s ability to adapt to market changes, along with its strong balance sheet, makes it an attractive option for investors looking for both income and growth. Given its success in annuity-style businesses and its ability to navigate market cycles, Macquarie is definitely one to watch for steady income and long-term capital appreciation.

We are reiterating our long-term “Buy” recommendation for Macquarie Group Limited (ASX: MQG), with a target price above $254 per share. The company’s diversified business model, strong capital position, and consistent performance across key segments give us confidence in its growth trajectory. With current market conditions and Macquarie’s solid fundamentals, we believe now is an ideal time to invest. Here’s why: Diversified Business Model Driving Growth Macquarie’s broad range of services, including asset management, banking, commodities trading, and capital investment, continues to position the company for robust growth. Its Macquarie Asset Management (MAM) and Banking and Financial Services (BFS) segments have shown significant improvements, underpinned by volume growth and higher performance fees. This diversification ensures Macquarie is well-positioned to navigate volatility in any particular sector. The continued success of its MAM segment, with assets under management (AUM) reaching $942.7 billion at the end of 2024, demonstrates Macquarie’s ability to attract and retain a strong client base. Furthermore, BFS has experienced solid growth in deposits and home loan portfolios, contributing to its overall financial performance. Solid Capital Position and Regulatory Strength Macquarie’s financial position comfortably exceeds the Australian Prudential Regulation Authority’s (APRA) Basel III regulatory requirements, with a capital surplus of $8.5 billion as of December 2024. This provides a strong foundation for continued growth, strategic acquisitions, and the ability to weather market fluctuations. Additionally, the company’s leverage ratio, liquidity coverage ratio, and net stable funding ratio remain well within regulatory limits, ensuring stability and flexibility for future investments. Macquarie’s disciplined approach to capital management and its strong financial position are key to its long-term growth and shareholder value creation. With the current market offering opportunities for strategic acquisitions, this capital strength allows Macquarie to capitalize on these favorable conditions. Growth in Annuity-Style and Markets-Facing Businesses While Macquarie’s markets-facing businesses, such as Commodities and Global Markets (CGM) and Macquarie Capital, faced challenges due to subdued conditions in certain commodity markets, they have still delivered solid results in other areas. Specifically, CGM benefited from improved performance in asset finance, particularly in shipping finance, technology, and resources. Meanwhile, Macquarie Capital saw higher fee and commission income, driven by increased mergers and acquisitions activity. Macquarie’s diversified portfolio provides a balanced mix of annuity-style income and market-facing revenue, which supports sustainable long-term growth. With the markets currently recovering from earlier economic slowdowns, we believe there is significant potential for Macquarie to see increased demand for its financial services, particularly in the commodities and investment sectors. Despite challenges in its markets-facing segments, Macquarie has proven its resilience through continued growth in its annuity-style businesses. The company’s strong capital position, diverse revenue streams, and consistent track record of growth make it an attractive long-term income stock with solid growth potential. We believe the current market environment offers favorable conditions for Macquarie to expand its business through acquisitions and invest in new opportunities. With interest rates and commodity prices stabilizing, Macquarie stands to benefit from increased demand in its key sectors. Given this, we believe now is the right time to invest in a company poised for long-term growth. Moreover, Macquarie’s disciplined risk management approach, alongside its ability to capitalize on market opportunities, makes it well-positioned for the future. Valuation and Target Price Regarding the valuation of MQG, we have employed two valuation models: the Dividend Stable Growth Model (DDM) and the Multi-Stage Dividend Discount Model, considering the company’s steady dividend history. For the DDM Stable Growth Model, we have considered an adjusted dividend yield ranging from 3.9% to 4.5% and a perpetuity growth rate of 5.5%, with a discount rate of 9.5%. This model gives us a fair value estimate of $226.58 per share. For the Multi-Stage Dividend Discount Model, we have assumed revenue growth ranging from 4% to 17.4% over the next five years, and dividend growth between 6.9% and 20.3%. This leads to a fair value estimate of $282.9 per share. By averaging these two models, we arrive at a fair value estimate of $254 per share, indicating that MQG is currently undervalued. With its diversified business model and solid capital position, Macquarie Group offers compelling long-term growth potential. Given the company’s strong fundamentals and the current market conditions, we believe now is the ideal time to invest. We maintain our “Buy” recommendation with a target price above $254 per share.

Macquarie Group has reported its earnings for the nine months ended December 2024, showcasing a mixed performance across its business segments. Overall, the net profit after tax (NPAT) came in at $2.14 billion, matching the result from the same period in the previous year. The performance highlights Macquarie’s resilience amid challenges in some of its market-facing businesses. Here’s a deeper dive into the key numbers and segment contributions: Net Profit After Tax (NPAT) The NPAT for the period was $2.14 billion, which reflects stability year-over-year. This result points to Macquarie’s capacity to maintain a solid earnings base despite fluctuating market conditions and pressures across various sectors. Segment Breakdown Macquarie Asset Management (MAM): The MAM segment posted strong results, driven by robust performance fees and growing assets under management (AUM). As of December 2024, total AUM reached $942.7 billion, reflecting a 3% quarter-on-quarter increase. The public investments AUM grew by 5%, supported by favorable currency movements. Private markets AUM also grew, reaching $371.7 billion. A significant portion of the growth came from higher valuations and successful fund divestments. The segment’s overall performance is a testament to the strength of its diversified investment strategies and its ability to capitalize on favorable market conditions, particularly in private equity and infrastructure. Banking and Financial Services (BFS): The BFS segment continued its solid growth trajectory, with deposits increasing by 7% to $163.8 billion. The home loan portfolio also grew by 5% to $136.2 billion. This was indicative of continued demand in the retail banking sector, despite some margin pressures. The growth in loans and deposits was a key factor in driving higher profitability within the segment. Macquarie’s focus on growing volumes in the BFS segment has helped mitigate the impact of interest rate movements and margin compression. The business was also able to achieve lower operating costs, which contributed to an overall boost in profitability. Commodities and Global Markets (CGM): The CGM segment faced a more challenging environment, particularly in the third quarter of FY25. Earnings from the segment were significantly impacted by a slowdown in the commodity markets, which hurt overall profitability. The adverse timing of income recognition from energy contracts, particularly in North American Gas and Power, played a key role in the weaker performance. Despite this, the segment did benefit from growth in asset finance, particularly in the shipping finance, technology, and resources sectors. Additionally, there were positive contributions from risk management services, with stronger fee and commission income in foreign exchange and fixed income markets. While the segment faced headwinds, its ability to leverage diversified financing solutions helped to somewhat offset the declines. Macquarie Capital: Macquarie Capital saw a decline in investment income due to the timing of realized gains. The sector also experienced higher funding costs related to its expanding equity investment portfolio. Despite this, the segment benefited from an increase in advisory fees, particularly in mergers and acquisitions (M&A) and capital raising activities. Higher demand for bespoke financing solutions also supported the business, with the advisory arm seeing a boost in revenues. However, lower investment-related income reflected the more challenging market conditions, leading to a slight drag on overall profitability. International Operations and Earnings Growth Macquarie’s international operations continue to be a significant driver of its overall results. The group’s offshore earnings now account for 65% of its total income, highlighting the strong diversification of its income streams. This international reach helps cushion the group from adverse movements in any one region, giving it the flexibility to capitalize on opportunities as they arise globally. The diversification has been instrumental in stabilizing earnings, especially when certain markets face headwinds. Capital and Liquidity Position Macquarie’s capital and liquidity positions remain robust, with strong buffers against market volatility. As of December 2024, the group had a capital surplus of $8.5 billion, ensuring it is well-positioned to absorb potential market shocks. The group’s Common Equity Tier 1 (CET1) ratio stood at 12.6%, which is above regulatory minimum requirements. Additionally, the group’s leverage ratio remained healthy at 5.0%. In terms of liquidity, the group reported a Liquidity Coverage Ratio (LCR) of 196%, well above the required threshold. The Net Stable Funding Ratio (NSFR) was reported at 113%, reflecting the group’s ability to sustain its operations over the longer term. These metrics reflect Macquarie’s disciplined approach to maintaining a solid financial foundation, which provides flexibility for future growth and market stability.

Macquarie Group declared an interim dividend of $2.60 per share for the nine months to December 2024, a slight increase from $2.55 in the previous year. With a 61% payout ratio, the company maintains a balance between returning value to shareholders and preserving capital for future growth. The ongoing share buyback program also contributes to shareholder value.