​For those that have read previous iterations of this exercise, you may be aware that MQG is one security that we have always insisted offers a credible (if not better) substitute for the Big Four. Very rarely do we find businesses, especially in the financial services landscape, that can maintain the culture/mentality of a small firm in a large organisation. So, with that let’s get to the numbers; which may provide answers as to why this may be the case.

BFS (Banking and Financial Services) offered up a 12% contribution to 1H22, showcasing improvements across every single service line with highlights including a +4% growth in deposits, +8% growth in home loans, +12% in car loans and a significant +4% growth in funds on platform. More important (for us), is the AUM growth in MAC (Macquarie Asset Management). This is one division that always has our attention given its highly sticky revenue and annuity like return streams. AUM grew to AU $750bn or +2% in 3Q22 while private markets grew to $160.1bn equity under management with a significant $8.1bn in equity raised during the quarter. This is another attractive proposition, private markets are simply notoriously sticky given their long duration and relative insulation from market gyrations.

Looking further, to the Commodities and Global Markets division (CGM), the business continues to maintain momentum. Given the state of the energy markets across its key markets, including gas, we should see continued momentum here especially in the structured lending side of the business. CGM currently accounts for a tidy 43% of the total 1H22 earnings. Macquarie Capital has also seen significant deal flow although this is one division we have never been fixated upon given that it is exceptionally pro-cyclical in nature.

Risk wise, MQG’s CET1 ratio has increased to 15.4% (compared to 12.6% at the time of our previous notes) and the balance sheet remains stellar. Overall, the business seems to be ticking boxes and continues to offer an attractive risk-reward proposition. Asset gathering continues to be the most attractive attribute and, given the infrastructure pipeline globally, we see a secular growth story here and an ability to maintain annuity-like revenue streams that offer an exceptional buffer. To give a little context on the opportunity set across infrastructure and the green transition, the numbers stand at approximately US $75tn according to the firm’s own briefing.

Red Flags & Risks: The big risk for Macquarie is the headwinds faced via a bullish AUD. Despite recent price action given our view on commodities, we think that there is upside risk here despite interest rate parity. The fee structures that are so attractive to shareholders could also be detrimental in the long run and risk cannibalising the book.

Expectations: MQG remains a fair substitute for the Big Four with a well-diversified business and is an arguably greater risk-reward proposition. When we wrote about this security previously, we thought it may be fairly valued at AU $149.540. At AU $200.72 per share, it continues to be expensive from a purely PE perspective. Nevertheless, investors may have to continue paying a premium given the prospects.
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Dividend Yield: The current dividend yield stands at a not so exceptional 2.8%, assuming a price of $200.72 AUD. But this may be a dividend growth story.
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​When we last looked at this company we were of the opinion that, despite the historic value destruction it has brought many shareholders, this was one security that may have hit an inflection point. The major contention was that the industry-wide race to the bottom, as represented by aggressive market share acquisition strategies, may be behind the sector and that the revitalisation strategy undertaken by CEO Andy Penn ticked the right boxes. It has been proven true on all counts, if not even better than expectations. It has been a rather eventful year for the business with many surprises.

The first surprise was the mobile network sharing agreement between arch rivals TLS and TPG, whereby TPG pays the business for access to a significant portion of Telstra’s regional footprint. This not only allows incremental growth in its wholesale earnings but allows for increased quality across its metro and regional networks. Interestingly, wholesale prices will be increased by mid-year while inflation indexed pricing will be added on (this is a significant development for investors looking to find some cover against the ever increasing inflation story). This story will be the one to watch out for when looking at the business, at least with regards to the mobile division. Conversely, fixed enterprise continues to be a concern for us and this is where the business comes in direct competition with NBN. Although the company has made some strides in offering value add, it still has a way to go especially in managed data and, quite simply, evolving away from its public sector mindset.

Management-wise, we were surprised by Andy Penn’s departure. We were particularly fond of him and his overall handling of the headwinds faced by the business. He will be replaced by industry veteran and CFO VIkki Brady. The board didn’t look far and may have learnt from the Sol Trujillo fiasco; we will see what she has to offer and if it will be a substantial diversion from the Penn/T22 years. We would like to see some outside the box thinking in terms of value add. Perhaps content? Similar to the business’ American counterparts or even Optus.
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Looking at the numbers, the aspirational AU $7.5 – 8bn EBITDA target for 2023 now almost looks to be a given. Financial metrics were certainly less than pleasing for 1H22 with EBITDA coming in at AU $3.5bn (down -14.8%) and NPAT of AU $700m, this masks the one-off events as a result of the restructure and the stabilisation as well as growth within the primary segments, including mobile. We have seen consistent delivery in the cost-outs as a result of the T22 strategy, which mitigated the earnings hit by AU $2.3bn. We will also see significant tailwinds in the form of market leadership in the transition to 5G. Simply put though, the business is well positioned to hit the ground running going forward.

Red Flags & Risks: The industry has finally stabilised with rationalised market shares and consolidation. The risks going forward will be uncertainty around management and the potential for change in strategy. CFOs typically have great track records delivering efficiencies but not necessarily with customer acquisition or retention. We feel that the company continues to underestimate the headwinds for its fixed enterprise divisions, especially with competition from niche providers.

Expectations: The company continues to be an attractive risk-reward proposition given its valuation, despite being significantly higher than our previous writing. Given guidance, we think the surprises may be to the upside.
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​Dividend Yield: Expected dividend yield stands at an exceptional 4.02% assuming a price of AU $3.98.