Value in Volatility | Macquarie Group (ASX:MQG) Share Recommendation

Ord Minnett Research Recommendation:   Macquarie Group (ASX: MQG)  

Macquarie Group’s most recent guidance for commodities income to be “significantly up on FY21”, provided at the operational briefing in February, was given prior to the recent spike in energy prices. Since then, international events have contributed to much higher natural gas price volatility, which in Ord Minnett’s view should provide strong support to trading income. We now forecast commodities income will increase 27% in FY22 to $3.4bn, falling to $2.6bn in FY23, with volatility likely extending into the first half of FY23.

We believe Macquarie has a good track record on risk and note investors’ concerns about counterparty risk stem largely from a single exposure in the LME nickel market involving banks in China. In the short term, Macquarie should benefit from the transition to renewable energy through both the Commodities and Global Markets division, due to increased volatility, and the Green Investment Group (GIG) via renewables development.

Since the operational briefing in February, Macquarie Infrastructure and Real Estate has announced a number of acquisitions in infrastructure and renewable energy. We think this bodes well for future base fee growth. We also note the spin-off of GIG’s offshore wind projects into a separate company, Corio Generation, likely reflecting growing investor demand for early-stage renewable energy projects.

We expect currency rates to be immaterial to the second half of FY23, with a weaker AUD/USD exchange rate offset largely by the stronger AUD/EUR rate. Spot rates are currently above their averages for the second half, which would point to a modest headwind emerging for FY23 and FY24.

We have lifted our FY22 group net profit forecast by 2% to $4.5bn, increasing commodities income growth to more than 27% for FY22, offset partly by higher impairments. We note Macquarie has immaterial direct exposure to Russia or Ukraine. Our net profit estimates have risen 4% in FY23 and 2% in FY24 due to slightly higher FY23 commodities income and bonus pool adjustments. We maintain our Accumulate recommendation and have raised our target price to $227.00 from $223.00.