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Macquarie Group Limited (MQG)

Monday September 8, 2008, 4:52 pm

Recommendations: Buy

MQG's current stock prices

Investment Rating:

MQG is Australia's most successful investment bank. Strength lies in the diversity of the income stream laden with annuity style income courtesy of the growing specialist funds under management. International expansion adds another dimension to group earning capacity. A duplication of the successful Australian model offshore provides upside potential as long as favourable investment banking conditions persist. Management is sharp and astute ever ready to take full advantage of market situations. MQG is ideal for growth oriented investors.

Event:

Last week the 'Macquarie Model' was effectively given the last rites, well almost.

Some major broking houses, hedge funds and commentators pronounced the passing with recommendations of short and stay short.

Based on asset recycling - asset acquisition, re-packaging and on sale to listed or unlisted specialist funds managed by Macquarie - the model requires the combination of cheap and abundant funds coupled with asset inflation. All 3 requirements no longer exist - at least for the next year or so - following the fall out from the US sub-prime debacle. In addition leverage was progressively added as conditions in the global financial and credit markets changed.

Impact:

Away from the asset recycling operations, MQG conducts a number of very profitable operations that neither Allco Finance Group nor Babcock & Brown possessed. These include a leading corporate advisory and M&A operation, robust Treasury and Commodities operations, major institutional and retail equities operations, significant investment management and specialist funds activities.

Taking a conservative and prudent approach we downgrade our FY09 and FY10 NPAT estimates. We reduce FY09 from $1.7bn to $1.45bn and FY10 from $1.89bn to $1.5bn. Adding to the conservative approach we include all outstanding options in our EPS calculations.

Under these stressed estimates our intrinsic value falls from $86.10 to $73.40. Price triggers adjust accordingly.

We remain confident about MQG's medium to long-term prospects. It will survive the current hostile business conditions and resume an upward earnings growth path.

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