Sandstone Insights: Macquarie Group earnings set to rebound in FY25 with strategic share buyback plan

This article was written by Sandstone Insights on 7 May, 2024.

Suggestion: buy

Need to know

• Following FY24 results, FY25E consensus earnings have been revised down 7% to AU$4.1 billion, the largest negative revision in over two years. FY25E earnings growth is now expected at 18% year-on-year.
• Lead indicators, increased global capital activity, and rising M&A volumes suggest Macquarie's earnings headwinds are easing. Macquarie has also realised several green energy investments.
• Our buy rating is based on the expectation that Macquarie's earnings momentum will reverse in FY25E. Significant on-market buyback activity, likely to resume soon, will help bridge the earnings growth gap.

Positive indicators

Improved global financial activity and increased mergers and acquisitions (M&A) suggest Macquarie might see better days ahead. Macquarie has also cashed in on several green energy investment.

Recent performance

Historically, Macquarie has posted positive earnings. However, recent results have fallen short of expectations due to slower financial activity and increased costs. Consequently, earnings expectations for FY25 have been reduced by 7%.

Reasons for downgrade

• Delays in profiting from investments
• Stronger Australian dollar in December 2024
• Higher costs in specific business segments
• Timing issues with gains from renewable investments
• Weaker performance in their Commodities and Global Markets (CGM) unit.

Future growth potential

Banking and financial services have seen home loans and deposits increase by 10%, indicating strong future revenue. Meanwhile, asset management has experienced an 8% rise in assets under management and deployment in private markets, showing potential for future gains.

Global market trends

The renewed financial activity in global markets, especially in renewable assets, is a positive sign for Macquarie. Their CGM unit is well-positioned to benefit from any issues in the US energy markets.

Stock buyback program

Despite the downgrades, Macquarie’s share price could be supported by their strategy to buy back shares from the market. For example, they will stop trading shares around 13 May 2024. Additionally, their Dividend Reinvestment Plan (DRP) will neutralise about AU$200 million, which is a substantial volume of daily trading.

On-market activities

• Employee equity plan: Macquarie will buy shares for their employee equity plan from 11-28 June, accounting for about 17% of average daily trading volume.

• Share buyback: They have a AU$2 billion buyback plan, with AU$1.4 billion still remaining. This buyback has made up to 20% of the market’s daily turnover as of 6 March, at prices up to AU$200 per share.

Investment thesis

Macquarie's share price didn't perform well last year because their earnings dropped significantly, mainly due to higher costs and slower investment activities. In 2023/24, these conditions hurt Macquarie’s earnings and investor sentiment. However, falling inflation and bond yields should help improve investor sentiment towards Macquarie this year. Early signs of improved financial activity and a rise in global M&A volumes are encouraging.

Management believes the current share price is undervalued. Their AU$2 billion share buyback, which is 25% complete, started in late November 2023 when Macquarie’s share price was AU$170. We rate Macquarie as a buy.

Risks

In a 'risk-off' market, where investors are more cautious, Macquarie will generally underperform. Higher bond yields or real interest rates could negatively impact Macquarie's earnings. Key earnings drivers include gains from selling assets, performance fees, and client activity in M&A, equity, and commodity markets. Potential impairments and lending losses could also drag on earnings.

Overall, while there are risks, we believe that Macquarie presents a solid buy opportunity, especially given the planned share buybacks and improving market conditions.

^{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}