MBL Earns More But Restructure Remains The Key

Sydney, Nov 15, 2006 (ABN Newswire) - And that other great imponderable of Australian investment, Macquarie Bank: what do we make of what seems to be a better than expected interim result for the 2007 year?

I reckon respectable scepticism: Macquarie has so many income streams and so many variables that you accept the company's announcements at face value and wonder about the composition and quality of the reported figures.

Certainly the market was on the whole supportive and believed the numbers yesterday.

MBL shares finished 81c higher at $75.39 after hitting a high of $76.45 (and a low of $74.93). Turnover was modest.

Macquarie said first-half profit climbed 51 per cent to a record on asset sales and higher fees from managing investment funds and arranging takeovers.

Net profit rose to $730 million in the six months to September 30, from $482 million in the first half of 2005-06.

Macquarie said that "Excluding the realisation of the Bank's holding in the Macquarie Goodman Group (MGQ), the result was a 32% increase on the prior corresponding period, highlighting the strong growth in underlying earnings. Earnings per share for the six month period increased 41% to 300.9 cents from 212.9 cents for the prior corresponding period."

With the bank paying an interim dividend of $1.25 a share and committed to paying between 50 and 60 in dividends, the likelihood is there for a substantial jump in final dividend next year. Based on the top line figure of $3.000 a share in eps, the interim of $1.25 is a payout of $1.41, pointing to a sharp rise in the second half payout.

Net fee and commission income rose 16 percent to $1.4 billion in the half. That includes fees from managing funds, merger advisory work and brokerage and commission income from its securities business. Total assets under management rose by 37 percent to $153 billion.

Macquarie and its partners raised $1.1 billion selling Dyno Nobel shares to the public in April. Macquarie led a group in buying the Oslo-based explosives maker for $1.7 billion last year and then sold the operation's European, African and Latin American units to Melbourne-based Orica $685 million.

The bank also booked a profit of $90 million in the half after raising $733 million from the sale of its 7.7 per cent stake in Sydney-based property trust Macquarie Goodman Group.

The interim dividend of $1.25, up from 90 cents a year earlier, is a bit under what some brokers had been forecasting. Some had seen a dividend as high as the range $1.40 to $1.50 a share.

CEO Allan Moss said the bank benefited from a "number of one-off transactions'' in the half and that "this growth may be difficult to repeat in the short term.'' (The bank always warns about the variable nature of earnings (but underlying all this are the base management and performance fees.)

Income from asset and investment sales rose to $933 million from $142 million a year earlier. Moss forecast the bank will beat last year's second-half profit of $434 million, pushing earnings past $1.1 billion and making it more profitable than St George (I know, they are chalk and cheese)

In a September briefing Macquarie said first-half earnings would rise at least 40 per cent, and profit for the 12 months ending March 31 would beat the record $916 million posted a year earlier.

But the big issue (besides the $1.3 billion in deals still on its books) is the restructure that will force the bank to adopt a more traditional non-executive chairman structure on a board sitting over a much different looking company.

The bank says it is still in talks with the Australian Prudential Regulation Authority to form a new non-operating holding company owning both banking and non-banking units as its fund-management business grows faster than its domestic banking operations.

CFO, Greg ward says it could take 18 months to resolve the question of the new structure.

The attraction is the reduction in the amount of capital the bank needs to support its operations, the downside is the decision on whether current executive chairman, David Clarke stays and becomes non-executive, or leaves and forces a wholesale change in the management structure.

It is a big, big moment for Macquarie, more than any deal. It doesn't want to change the current executive chairman structure but from reports APRA is insisting on it.

Could Macquarie find that too much of a price to pay or will it sacrifice Mr Clarke (with suitable recompense) and bring on a succession change, or will it find a non-executive chairman from outside?And what about those big shareholders who value Allan Moss's steady reliability and prudence and wonder about whether his possible successors have the same thinking...............................And what was the reaction from the broking analysts?Well an early comment came from Goldman Sachs JB Were:"Whilst we accept that the headline looks encouraging, we would caution investors getting too positive on MBL at current prices."Over the past few years, we have seen a disturbing trend in MBL's earnings and that has been a divergence between reported earning and underlying earnings. "Effectively, MBL has been generating more and more of its income from more volatile earnings such as asset sales, performance fees, ineffective hedges and abnormally low tax rates."The 1H07 result was a good example of this trend with MBL generating ~40% of earnings from these lower quality items."In our view the sustainability of this income stream is questionable with rising competition, a return to normal effective tax rates and expectations of a correction in asset prices at some point likely to place pressure on these earnings."Furthermore, we would argue that as competition increases there are also some concerns over the sustainability of high growth rates in the core business, particularly the infrastructure model. We do believe that fundamentally MBL is overpriced at current levels with the market not effectively valuing the risk in the earnings stream. "That said, whilst the stock is overpriced, we acknowledge that MBL is a news flow and momentum driven stock and neither of these thematics is likely to change in the near term."

AIR publishes a weekly magazine. Subscriptions are free at http://www.aireview.com.au