More Brokers Recognising Value In Macquarie29/01/2010 1:15:02...

More Brokers Recognising Value In Macquarie
29/01/2010 1:15:02 PM
By Chris Shaw

Last week FNArena reported on Citi and Credit Suisse lifting earnings expectations for Macquarie Group (MQG.AX
MACQUARIE GROUP31 January,201031/01/2010 17:59 Sydney, Australia.
Price Change % Change
50.160 -0.860 -1.690%

Company overview
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MQG.AX , 50.160, -0.860, -1.690%), in FY11 in particular (see: A New Earnings Cycle For Macquarie, 20/01/10). Today there is evidence others in the market are equally recognising the value on offer with both Bank of America Merrill Lynch and RBS Australia upgrading the stock to Buy.

The upgrades are from Neutral recommendations previously and come on the heels of UBS placing a Short-Term Buy rating on Macquarie a few days ago. It is UBS's view the market is likely to react positively to the upcoming trading update on February 9th and that the shares offer good leverage to improving activity levels in investment markets.

For BA-Merrill Lynch as well, the potential upside comes from the expectation the company should be able to leverage improving market conditions, while BA-ML also sees scope for payoffs from recent investments and improving revenue productivity from staff to return Macquarie to generating "high teen" levels of return on equity. The market is currently pricing the shares as if this is unlikely, says the stockbroker.

BA Merrill Lynch's view accounts for the fact market conditions remain choppy and uncertain and it sees this as actually playing into Macquarie's favour in some respects as volatility can offer opportunities with respect to merger and acquisition activity and for improved returns on equity investments.

Macquarie is also a cleaner play following a re-shaping of the business, one BA-ML sees as having a renewed focus and significant opportunities for generating growth around the world. Recent acquisitions reflect this with the stockbroker estimating the Blackmont Capital, Delaware, FoxPittKelton, Tristone, Constellation equity and Sal Oppenheim acquisitions made in the past year could add as much as $1 billion to group revenues.

This should see group revenues come in slightly better than guidance for the second half of FY10, yet despite such an outlook BA-ML notes relative value has actually improved as the share price is below that of five years ago as the stock has underperformed the broader bank index in that period.

Having reviewed its model, BA-ML has lifted its earnings per share (EPS) forecasts by 8% in FY10 and by 12% in FY11 to 329c and 479c respectively, which compares to consensus forecasts according to the FNArena database of 321.7c in FY10 and 420.6c in FY11.

Longer-term the stockbroker expects through to FY13 Macquarie should generate annual earnings growth of around 28%, which would imply returns on equity of better than 18%. Macquarie Capital should be a contributor to this as on the broker's estimates there is as much as 80% upside potential for front office revenues per head in this division, while recent deployments of excess capital into acquisitions and higher volumes also bode well for stronger earnings going forward.

RBS Australia has also factored in lower expected bad debts and higher merger and acquisition and initial public offering revenues in FY11 in particular. While upgrading to a Buy rating, RBS's EPS forecasts now stand at 331c this year and 420c in FY11. With the Australasian economy strengthening and the stock looking inexpensive on a forecast FY11 earnings multiple of 12 times, RBS too sees value at current levels.

BA-Merrill Lynch's FY11 forecasts are at present above consensus estimates, but the stockbroker expects this difference will close in coming months as the case for higher returns on equity strengthens and this is factored into the forecasts of other analysts covering the stock.

It is a view shared by Credit Suisse, who last week suggested consensus earnings estimates were conservative given what it sees as a likely earnings upgrade cycle for Macquarie. Such a trend could begin in the second half of FY10 as BA-Merrill Lynch is forecasting revenues for the period of $3.7 billion, slightly better than guidance offered by management.

Having revised its earnings forecasts, BA Merrill Lynch has also upped its price target, lifting it to $70.00 from $60.60. RBS Australia has similarly lifted its target to $60.00 from $50.00, meaning the average price target according to the FNArena database now stands at $59.73, up from $57.30.

Today's upgrades by BA-Merrill Lynch and RBS Australia mean the database now shows four Buys and five Holds, though as noted UBS has a Short-Term Buy to go along with its longer-term Neutral rating.

Shares in Macquarie today are weaker in an overall depressed share market. As at 11.10am the stock was down 67c at $50.35, which compares to a range over the past year of $15.00 to $58.80.