Investment bank Macquarie Group (ASX: MQG) has beaten analyst forecasts with a 39% lift in interim profit when compared with last year's corresponding period. Traditionally first half profit is noticeably lower than the second half, suggesting that 2014 annual profit is likely to be the highest since the onset of the GFC.
Annuity style businesses continue to perform well with assets under management reaching $385 billion. Infrastructure funds (Macquarie is the global leader in infrastructure) are a major contributor here and the outlook suggests significant growth in assets under management can be expected to continue.
Although both earnings quality and consistency have improved with the strategic shift into funds management, corporate/asset finance and broader financial services, Macquarie will struggle to achieve the stellar returns available to investment banks in the early part of this century. As a vote of confidence in its current capital position, Macquarie has decided (subject to shareholder approval) to distribute the Sydney Airport (ASX: SYD) stake to shareholders on a 1:1 basis. If approved, this $1.4 billion capital return will take place early 2014, followed by a share consolidation.
Despite the earnings improvement, return on equity is still poor at 8.7% for the first half. Although this can be expected to improve over the full year, more work needs to be done, however the low return on equity is to some extent a reflection of Macquarie's conservative capital position and strategic direction. Annuity style businesses tend to develop their own organic momentum once critical mass has been achieved, and Macquarie is well placed here.
A wildcard with Macquarie is the slowly resurgent activity in mergers and acquisitions. Macquarie has retained the necessary staff and expertise to take full advantage should this activity continue to grow – mergers and acquisitions are essentially the icing on the cake for investment banks.
In summary a good interim result.
Foolish takeaway
At $53 Macquarie is trading around 1.5 times book value and 16 times projected 2014 earnings. Not unreasonable for a company with solid growth prospects over the medium-term. With international income now representing 66% of revenue, Macquarie is well placed to benefit from a lower dollar and resurgent economies in Asia, the Americas and parts of Europe. In my view, it is a buy.
