Investment view
Four powerful long-term structural tailwinds. MQG has strategically positioned into four industry areas that should be able to grow well above GDP over the long term. 1) Energy; 2) Infrastructure; 3) Private markets; 4) Asset management.
What is driving the earnings improvement? The last four years have been extremely favourable for MQG’s market-facing businesses. Revenue has grown >140%, lifting earnings >250% benefiting from disruption in conventional oil and gas markets.
Will earnings crack in FY23E? Forecasting MQG’s earnings is challenging given the impact of market events on the Group. A potential offset is ~$5bn of unrealised gains in MQG equity investments which will be realised over coming years. >70% of equity investments are held at cost. In our view there is a heightened risk that MQG earnings growth stagnates in FY23E and FY24E.
Remuneration model rewards entrepreneurial behavior. MQG has been at the forefront of aligning employee pay with shareholders’ returns. At its core, the model rewards entrepreneurism. CEO pay best shows the incentive structure. MQG CEO’s fixed component of remuneration is 5%. In contrast CBA is 44%, NAB is 47%.
Low base pay is associated with stronger shareholder returns. In 2021 ASX 100 CEO pay averaged $1.5m. MQG CEO base was half that, whilst the major banks had base pay +65% higher than the median ASX100 CEO at ~$2.5m. MQG’s average annualised returns to shareholders have been 15%, outstripping both CBA and NAB over the last 20 years. Above-average base pay we find is typically associated with companies in oligopoly market structures.
Headcount growth has slowed, but not at the expense of earnings. Traditionally a strong indicator of future earnings, headcount growth has slowed over the last 5 years (4.6% vs 6.8% 20-year average). This has not been at cost of earnings growth, which has accelerated from 11.1% (20-year average) to 13.8% (5-year average).
Alternative assets should be more durable than listed assets. MQG’s alternative asset capabilities are well understood and differentiated from peers. This provides a degree of earnings resilience relative to listed assets. Macquarie locks up investor capital for +10 years which should help protect funds under management and the associated earnings.
Risks to investment view
The MQG share price is typically more volatile than the market. In a ‘risk off’ environment MQG will generally underperform the market. Key influences on MQG’s earnings include gains on asset sales/performance fees, client activity levels in M&A, equity and commodity markets. Impairments and lending losses can be a drag on earnings. Stronger than expected earnings in FY23E would be risk to our Hold recommendation.
Investment view
We regard MQG as one of the highest quality large cap companies on the ASX. A consistent track record of deploying additional capital above its cost of capital. Earnings growth has been in the top quartile of ASX 100 companies over the last 20 years.
A culture of strong leadership, capital discipline backed by renumeration model which insures against the onset of hubris. We believe MQG’s competitive advantage of scale, industry expertise and adaptable business model can continue to generate strong returns on capital into the future.
The key issue for us in the short term is the cycling of the exceptionally strong FY22 earnings, which delivered +50% growth, primarily from the markets facing business driven by a strong period of energy price volatility. Whilst visibility on MQG’s earnings drivers remain opaque, FY23E is likely to be a year of negative growth (market currently assuming -10% in FY23E).
Whilst MQG earnings are likely to prove more resilient than market currently gives it credit for, we believe the share price is unlikely to be as defensive. In prior global equity bear-markets, MQG troughed at ~12-13x PER (not withstanding business evolution over the years).
