How Macquarie’s value could triple in a decadeWith its shares...

How Macquarie’s value could triple in a decade

With its shares trading near record levels, investors are working to understand where its future growth comes from. New analysis helps answer that puzzle.

Sep 18, 2024 – 11.59am

AFR

Pssst. Macquarie Group shares are on a quiet tear.

After releasing a weaker than expected June quarter update towards the end of July and navigating the mini market heart attack at the start of last month, the stock surged more than 16 per cent to hit a record high of $228.40 on Monday.

It’s no surprise that this recent share price jump came against the backdrop of Macquarie sealing a generational deal: the $24 billion sale of data centre giant AirTrunk, which Macquarie invested in four years ago at a valuation of just $3 billion.

But like the big four banks, Macquarie’s valuation looks elevated. It trades on 21.3 times next year’s earnings, well above its average multiple over the past five years of 14.3 times. The question of where the Millionaire’s Factory gets its next phase of growth from is justifiably front-of-mind for analysts and investors.

To try to answer this question, Barrenjoey analyst Jonathan Mott has been digging into the megatrends that have underpinned the group’s growth in recent years: urbanisation (through traditional infrastructure investing), digitisation (including data centres) and green energy.

His conclusion? Macquarie doesn’t need to find a new growth bet or latch on to a new megatrend because there is already substantial “embedded revenue upside across the Macquarie empire, via exposures most investors have never heard of”.

$600 a share in a decade

Macquarie’s ambitions in green energy, for example, and the sheer scale of the $US275 trillion ($407 trillion) energy transition, mean there are scenarios where Macquarie’s growth in this sector alone could propel its valuation towards $600 a share in a decade’s time.

Similarly, AirTrunk is only the tip of the iceberg in terms of Macquarie’s exposure to data centres. Two investments in larger data centre businesses are among about 4.6 gigawatts of built capacity and a further 3.6GW of planned capacity across 10 investments.

“One of MQG’s greatest skills is its long-term focus on global megatrends, with ‘patient adjacent growth’ into new products and markets to leverage these trends,” Mott says. “The megatrends of decarbonisation, urbanisation and digitisation have decades of runway and Macquarie as a global leader in these fields has substantial opportunities ahead.”

Macquarie’s long history as one of the world’s largest managers of traditional infrastructure is well documented. But Mott’s analysis of a staggering 123 deals announced by Macquarie in the past five years – either on its own balance sheet or, more frequently, through its massive Macquarie Asset Management business – shows no reduction in its focus on this part of the market.

Even if we look at just the equity investments made in the second half of Macquarie’s 2024 financial year (which ended in March), we see transport, industrial and infrastructure transactions captured the largest share at 22 per cent, or $2.9 billion.

‘Not beyond the realms of possibility’

Mott’s analysis also shows the size of the average equity investment has been steadily rising over the past five years, particularly in this traditional infrastructure space.

But Macquarie’s stated ambition is to increase the size of its green energy asset management business such that it matches its traditional infrastructure business in a decade’s time. Mott says that to get there, Macquarie would need to manage about $1.135 trillion in 2034, a goal he says is “very challenging, but not beyond the realms of possibility”.

It’s important to note that Macquarie’s green energy business is in the midst of an important change. It is moving from a model where most assets are held on its balance sheet, to one where the assets are held in its funds. This will mean the bulk of profit from green energy will come not from asset realisations, but from base and performance fees.

Mott says that means earnings from green energy will be back-ended. As equity under management grows over time, base and performance fees get bigger.

Forecasting out to 2034 is obviously incredibly difficult. But Mott says if he were to extrapolate his Macquarie earnings estimates to 2029 and assume Macquarie can increase the size of its green asset business to be in line with its infrastructure business in the next decade, group earnings could be up to 40 per cent higher than Barrenjoey’s estimates currently imply, at about $12.9 billion. For comparison, Macquarie’s profit in 2024 was $3.5 billion.

Applying a multiple of 17 times, assuming no dilution of Macquarie shares, that suggests a share price of $600 – which Mott stresses is merely a scenario, and not a target price.

AirTrunk points the way

The embedded profits in Macquarie’s digital business was on display on Tuesday, when reports out of the UK suggested the group may look to sell down its stake in British IT services firm Wavenet, which could be valued at £1.2 billion ($2.3 billion) in a deal.

The size of the opportunity inside Macquarie’s data centre business is harder to pin down – in part due to a lack of disclosure beyond basic information at the size of current and planned capacity, and land size. But the AirTrunk deal tells us a lot about the direction of travel.

Mott says the performance fee from AirTrunk is likely to come in between $1 billion and $1.2 billion, probably paid over the course of the 2026 and 2027 financial years. But he says this could be “dwarfed by other exposures in coming years”.

Macquarie’s biggest data centre bet is on a company called NTT Data, a top 10 global data centre operator headquartered in Japan. In 2022, Macquarie Asset Management paid about $1 billion to enter a venture in which it will jointly own European and US data centres with NTT.

Another big exposure is via US data centre operator Aligned, into which it is estimated that Macquarie Investment Partners ploughed $US1.3 billion in 2018.

The big lesson

Mott’s hope had been to try to put a value on the data centre business, but he is “more comfortable looking at each of these assets with the expectation that there is likely to be substantial (albeit publicly unquantifiable) valuation uplift since investment. This is likely to either help underpin our performance fee and asset realisation estimates with the potential for further upside over coming years.”

In many ways, Mott’s view that Macquarie will keep riding the very large trends it is already engaged with is hardly a surprise.

Macquarie chief executive Shemara Wikramanayake, like Nicholas Moore before her, regularly hoses down the idea that teams of people are sitting inside Macquarie headquarters, scouring the world for the next big thing for Macquarie to pounce on. Instead, ideas come from the ground up. Its bankers in the field do a deal, which helps to identify the next opportunity, which leads to the next deal, and then the next opportunity.

Mott’s big lesson is that the data centre and green energy sectors will prove fertile ground for approach for decades to come. The seeds of Macquarie’s next growth era may have already been sown.