Stockbroker Bell Potter this week raised its 12-month price target for Macquarie Group Ltd (ASX: MQG) shares from $105 to $108 and retained its buy recommendation.
The update comes just after shares in the group broke through $100 for the first time ever earlier this week, driven by a strong first half FY2018 performance announced in late October.
In its half-year presentation, Macquarie stated net profit after tax (NPAT) rose 19% compared to the prior corresponding period while operating expenses reduced by 1%.
Group return on equity rose to 16.7% compared with 14.6% for the first half of FY 2017. Macquarie also raised its interim dividend by 8% and announced an on-market share buyback of up to $1 billion.
Macquarie's annuity-style businesses are key drivers of earnings growth and now contribute around 80% of group profit. This type of investment has become increasingly popular as investors seek the stable and predictable returns that annuities provide.
I believe the momentum of annuity investing will continue and be a strong driver of Macquarie's profits in the near to medium-term.
Also benefitting Macquarie is our falling domestic currency, as the group generates 62% of total income from outside of Australia.
Macquarie estimates that a 10% movement in the Australian dollar will have a 6% impact on group net profit after tax. Since September, when the Australian was buying more than USD $0.805, our dollar has fallen approximately 6% and continues its downward trend towards USD $0.750.
Bell Potter expects Macquarie's NPAT to grow 4% in FY2018 and to increase its full-year dividend. These estimates were unchanged from previous analysis, but the 12-month price target was increased due to a perceived lower cost of equity that is more reflective of the group's lower operating risk profile.
The stockbroker also flagged the strong likelihood of lower corporate tax rates in the United States as a catalyst for further valuation upside.
Foolish takeaway
Trading on a similar price-to-earnings ratio as Australia's Big 4 banks, I expect Macquarie to deliver superior investment returns given its higher growth outlook and overseas market exposure while still paying an attractive dividend yield.
