MQG FY25 --solid but subdued

 MQG FY25 RESULT

NPAT +5% and EPS +7% ROE 11.2%

Interestingly, MQG changed a disclosure expanding the segments of how they describe their revenues to now include recurring revenues, as well as annuity and market-facing. The new disclosure has a split of 54% annuity, 29% recurring and 17% market facing. The object is to highlight the stable nature of MQG revenues compared to similar IB’s that have much more trading income.

One of the reasons it is quite difficult to forecast earnings every year for MQG is due to the importance of performance fees and gains on asset sales. Both can swing widely, and timing is hard to predict. The importance of disclosure of these items makes assessing the underlying operations more transparent. PF’s are disclosed, but asset sale profits are harder to identify.

My base case for PF and asset sales is that they grow with the asset base but vary considerably from year to year. ROE is higher when PF and sales are higher, and lower without them. The underlying operations can be assessed as a base profitability and an expected long-term earnings rate for PF and asset sale profits, smoothed above those underlying profits. That's the framework. I target a ROE on expected capital going forward.

Having said that, on what is disclosed, this was a lower result than usual, with or without adjusting for PF and sales. The critical issue is has the long-term earnings power of the company declined? On this, I am slightly more downbeat but not overly so.

Main points

1.      Staff numbers fell for only the second time in the last 10 years. Cost control was good, but also an indication of the tough operating environment.

2.      Profits fell in the Americas and for CGM (commodities). Most likely due to lower profits in the energy space in NA, with oil prices falling and a lack of volatility, with clients no longer looking to hedge.

3.      MQG acknowledged that private credit is in a mania. MCap has a large book on balance sheet but it was pointed out that MQG has a long history of structural finance, knows the clients and the business is skewed to incoming. That reduces risk. However, MAM is planning PC funds that will be fee-generating but off balance sheet, ie it is the client's money. You have been told.

4.      MAM has sold its NA public equities business. that is a good move, imo. The main focus is infrastructure, private markets, real assets and PE. Described fund raising outlook as good.

5.      Credit provisioning increased, pre-emptive in nature.

6.      MQG looks to have reduced their exposure to green assets on b/s. mentioned that solar asset values are holding, offshore wind is challenged, and all sales are at a profit so far. The overall equity book $13.4B, mainly seed investments in MAM and businesses held by MCap  (These are potentially future IPO’s there are large amounts in enterprise software and reg/compliance software).

7.      There was some comment on emerging competition for CGM. If sustained could reduce the return profile for the group- CGM is a big contributor.  

8.      Outlook flat to slightly up, which is probably as good as could be expected in this environment.  On the likelihood of a large macro slowdown, comments were, MAM should be ok, due to large private markets exposure, BFS ok, CGM depends on the volatility and market levels in commodities, and Mcap is vulnerable to a slowdown. Contributions are approx.. MAM 23%, BFS 20%, CGM 41% and Mcap 15%. therefore, the swing in commodities does count and was poor this year.

9.      MQG gives an underlying broad comparison of segmental ROE versus the 19-year average. Being Annuity biz 15% versus 21% ave, and Market facing 13% versus 17% ave. Assuming no structural issues indicates MQG is under-earning in this result. Excess capital $9.5B. MQG have bought back $1B at $190ps.

 

CONCLUSION

Solid but subdued in a relatively tough environment. MQG is multifaceted and constantly evolves, so it is difficult to point to structural issues that impede growth.

Over the last year I have sold at $233 and bought back at $164 and that sets the valuation range, imo, maybe a bit tighter given the risks.  

Held top10 position 

from the transcript i add

Getting a Higher ROE

But again, just a high-level response from me is that BFS is certainly meeting the return on equity targets that we have for BFS. And I think CGM is as well, the two places where we are at the investing that have impact on return on equity in Macquarie Capital, where we're putting a lot of equity to work and seasoning the book. But also in Macquarie Asset Management, where with our balance sheet invested in things like green assets, even the aircraft finance that were all brought across into MAM, we're still taking those to a fiduciary strategy. We've had very good raising in the fiduciary offerings in Macquarie Asset Management, the energy transition fund, the core renewable more mature asset funds and the fiduciary side is growing, but we have to run off the balance sheet. And as we said, there's still $A1.3b there with a lot of operating expenses on it as well, that's bringing down short term return on equity. So those are the two main contributors. I mean, the other thing obviously is we're putting, as we grow the client franchise, you're growing return on equity rich businesses. So if you think about MAM growing the assets under management or raising more equity, deploying that equity, that's obviously return rich equity. If you think about CGM buying the client franchise that we've been doing over the last few years in CGM and stabilising the cost base, that obviously generates better return on equity. If you think about MCap in the private credit business, obviously one of the things about private credit apart from putting annuity-style income into that more traditional marketfacing exposed business is private credit generally, you're generating good return on equity from the moment you originate the line. the seasoning of the equity portfolio, which takes some time. In the intervening periods, you've obviously got the drag of the cost of equity while you're building into that season book. Also, MCap have four equity strategies. We have our infrastructure and development strategy, where we've seen a substantial growth in the last two years. And those assets take three to four years to get to maturity. So that's in part the seasoning. We've seen a good opportunity in growth and technology investing, all those investments are performing very well. But if we look to sell those assets, it may not be the best time right now. So we may decide to hold them a bit longer. And then we also in our Principal Finance business, we have a number of private equity investments alongside partners. And we've been investing heavily in areas like managed services, which is really a digitisation play. And we've made some add-ons there to existing platforms. And also, we just look to take them to market at the right time. So, as we've said before the back end of this year, we've got a number of realisations on the docket that we're looking at, but they're quite lumpy and they could shift into subsequent periods and then we start to see, we would hope a more sustained level of performance akin to what we've seen historically, which is around 23%. More broadly across the group, We're, I think, pleased with the cost control over the last 12 months. So, that's something that I know the whole management team is pretty focused on. The second thing, of course, is that we've been working for some time with our prudential regulator, with APRA. We're still sitting on, as you know, a Level 1 penalty and NCO outflows, those things. As we make further progress, we hope to make progress on removing some of those overlays as well. It's obviously subject to discussions and meeting the standard. And then, finally, obviously, the buyback. That'll obviously have an effect on return on equity, should we execute that as well.