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from Morningstar:

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Recommendation Impact (Last Updated: 08 Feb 2011)

Following the recent share price rise we lower our recommendation to Hold, but would Accumulate on dips below $40.00.

Event Analysis


FY11 guidance lowered by 10%


MQG reported that December 2010 quarter earnings were lower than pcp but well up on subdued September and June quarters. While market conditions are tracking back to more normal levels, the lower result reflects a continuation of subdued equity volumes in the Macquarie Securities Group (MSG), particularly in Europe and the US. All other business reported stronger results on a pcp basis.


Given the weaker MSG result, FY11 earnings are downgraded from previous guidance for a result in line with FY10. 2H11 earnings are expected to be up 35% on 1H11 but down 5% on pcp. This implies FY11 NPAT of around $950m, a 10% downgrade on previous guidance and the prior year.


While the earnings downgrade is disappointing, MQG remains leveraged to global markets and while markets have improved, the slow recovery in equity volumes is beyond its control. It is encouraging to see a strong performance from other divisions, which reflects better conditions and ongoing global expansion and growth initiatives.


The balance sheet remains strong with short term funding at 5% of total funding. Cash and liquid assets represent 30% of total assets. MQG is well capitalised with its excess capital increasing by $300m over the quarter to $3.2bn, so is well placed to fund future growth. While the final outcome of the Basel III capital requirements remains uncertain, MQG believes it will be well placed given its significant buffer.


We downgrade our FY11 earnings by 10.4%. We also lower FY12 by 5.8% given equity volume weakness looks set to continue into MQG�s new fiscal year. Given ongoing global expansion and strong pipeline of growth opportunities we increase medium-term forecasts. Our valuation falls marginally from $45.50 to $45.00. We see MQG as being well leveraged to improving market conditions and its continued global expansion provides significant growth potential as markets recover. Following the recent share price rise we lower our recommendation to Hold, but would Accumulate on dips below $40.00.


Key divisional highlights


***Macquarie Securities Group (MSG) continues to build its cash equities and derivatives businesses in the US and Europe. Despite the subdued volumes MQG appears to have maintained market share. This division is building a significant global presence and once equity market volumes recover will be a key contributor to earnings growth.


***Macquarie Capital continues to focus on advisory services in its key speciality sectors. We expect global M&A activity to pick up significantly in 2011 and this division will be a major beneficiary.




***Fixed Income Currencies and Commodities (FICC) continues to grow its Asian business out of the recently established Singapore hub with significant regional growth opportunities. The division also continues to build US credit trading activities and remains a major player in the North American gas markets. With the energy markets expected to continue growing rapidly, MQG is well placed.


***Macquarie Funds Group has around $300bn in assets under management largely unchanged on 30 September 2010. The acquisition of Delaware Investments in 2010 transformed this division into a major global asset manager providing regular annuity style revenue. Delaware is now consolidated into Macquarie Investment Management and is well positioned as demand for investment products improve.


***Corporate & Asset Finance continues to grow and now finances more than 16,000 motor vehicles in Australia. A further $500m motor vehicle lease and loan securitisation was undertaken during the quarter.