Macquarie Group: International Brokerage, Investment Banking and More

| About: Macquarie Group, (MQBKY)

Macquarie Group (OTC:MQBKY) is a well managed, global financial services company headquartered in Australia. Since its founding in 1968, MQBKY has grown into a diversified firm of global size, with offices in the US, Canada, Asia, Europe, and Australia.

Macquarie Group is listed on the Australian exchange as MQG.AX (A$50.00) and the ADR (American Deposit Receipts) in the US as MQBKY (USD $46.60). Since MQBKY reports in Australian dollars, financial numbers will be converted to US dollars at a A$1.00 : USD$0.93 exchange rate. Fiscal year end for Macquarie is March 30, and management is about to announce 2010 fiscal year results (April 1, 2009 to March 30, 2010) in a few weeks.

Macquarie is a bit different than your average American financial institution. MQBKY has interests in securities, both as a market-maker and a brokerage house, in retail banking, in commodities trading, and in investment banking. Unlike many financial institutions in the US and Europe, Macquarie has very little “toxic assets” on the books and is well capitalized. With its recently reported excess capital of more than $4 billion, MQBKY has been on a bit of an acquisition spree, adding to its asset base.

With all the financial institution “bad press”, it is nice to own a conservative, well managed firm that is profitable and growing. So far during the banking crisis, Macquarie has not been subject to the type of scrutiny and forced government oversight as their American and European counterparts.

Unlike some competitors, their reputation has not been tarnished and their balance sheet has not been trashed. This competitive advantage, along with recent strategic acquisitions, will improve their bottom line as world economies return to a more “normal” level. Pending re-regulation of US and European financial markets should improve MQBKY’s market position as marginal players exit and clients review their current financial relationships.

Macquarie is divided into several operating groups:

Securities – Macquarie is the #1 full service broker in Australia, #3 in New Zealand and has a strong presence in Asia. Securities revenues are broken down by region: 28% Australia, 54% Asia, 4% South Africa, 6% Canada, and 3% US. MQBKY is the 8th largest research firm worldwide, based on coverage of companies. Management acquired several regional investment firms in 2009 that will enhance assets under management, a key factor in developing future fee revenues.

Capital Markets – As with most investment banks, Macquarie offers debt, equity, and merger and acquisitions services to a variety of clients. This group also manages, for a fee, various investment funds. Macquarie has been a leader in developing publicly traded, or listed, and private, or unlisted, investment funds that specialize in infrastructure assets. Banking and Financial Services – MQBKY offers retail and commercial banking services, including credit cards and wealth management. Their main markets are Australia with a limited presence in Asia and the US, but the company is focusing on expanding its business in Canada by recent acquisitions. The firm services approximately 930,000 banking and financial services clients worldwide.

Corporate and Asset Finance – Macquarie offers corporate financing services including short- and long-term asset financing. MQBKY has been adding to its lease portfolio, both auto and aircraft, and recently announced the purchase of AIG’s aircraft leasing assets. MQBKY is the largest auto financier in Australia.

What initially attracted me to Macquarie Group was the Australian concept of “superannuation”, or mandatory retirement savings, and the privatization of that program. With few exceptions, all gainfully employed individuals in Australia are mandated to contribute 9% of their wages to an individual retirement fund, collected and remitted by their employer. These funds are managed by securities firms like Macquarie, and MQBKY the largest.

Management structures many of their retirement funds as proprietary “closed-end” and is available only to their account holders. The firm pools the steady stream of cash contributions and capital for further asset fund expansion. With increasing assets under management, fund fee revenues should be enhanced over time.

Macquarie Group is a mid-cap firm with a market cap of $15.5 billion, 334 million shares outstanding, anticipated FY March 10 revenues of $1.205 bil, and profits of $978 million. Earnings per share should be $2.90. MQBKY pays a dividend of $1.72, for a current yield of 3.7%. Book value is $29.34.

The company has a nice cushion of excess capital to fund further growth. Even after most of the proposed more stringent capital requirements are legislated for financial institutions, management should have at least $2.5 bil available for acquisitions. The ability to add assets from weaker firms looking to raise capital will improve earnings and book value over time. For example, the purchase of aircraft lease assets from AIG should offer double digit annual returns based on the discounted price paid.

Wall Street and Sydney investment analysts seem to like Macquarie’s prospects. Earnings per share consensus estimates are for $3.92 in FY2011 and $4.50 in FY2012, with comparable dividend increases to $2.17 and 2.50 respectively.

Investors looking for a high quality, international financial services firm should review Macquarie Group. Their Australian and Asian exposure, along with a growing Canadian market, will fuel earnings, dividend growth, and shareholder returns. At a PE of 13 to 14 x consensus FY2012 EPS should generate a price target of $58 to $63 and a dividend yield on current invested capital of 5.4%. Your due diligence should start at the most recent investor presentation on their website posted March 2010. Also keep an eye out for fiscal year end and accompanying management discussions in a few weeks.

Disclosure: Author is long MQBKY and has been a shareholder since 2007

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