Macquarie Group shares had another good run yesterday for the second day in a row as analysts absorbed the group’s 43% drop in interim profit and outlook for more of the same this half.
In fact the result brought two upgrades from Goldman Sachs JBWere and Citigroup to ‘buys’, which were few and far between for most of the year.
The shares ran up to $26.50 in an early burst of enthusiasm, before easing to close up 4.8% or just over $1 at $25.16.
Goldman Sachs JBWere told its clients yesterday that an investment in MQG wasn’t for the "faint-hearted" but for "long term institutional shareholders":
"We have increased FY09 EPS by 5.0% to reflect a strong 1H09 result.
"This includes an additional $450m write-down in investments in 2H09.
"Our forecasts are 15% below management’s guidance.
"With concerns around earning certainty high, we have taken the opportunity to factor further conservatism into our FY10 and FY11 forecasts, reducing these by 7.3% and 8.8% respectively.
"Following these changes our low case SOTP valuation is $44.35. MQG is also trading at 0.7x FY09E P/BV and 0.9x P/NTA, despite delivering a depressed ROE in line with the cost of capital.
"We have upgraded MQG to BUY (was Hold).
"Whilst some risks remain (e.g. write-downs) we have attempted to capture these risks in our forecasts and with the stock trading at P/NTA 0.9x FY09E we believe that the long-term risk / return profile is supportive at current prices.
"That said, MQG is likely to remain a high-beta play and volatile in the short-term. As such, we believe this stock is best suited for long-term institutional shareholders and not for the faint-hearted."
And Citigroup took a similar view yesterday:
"While cognisant that MQG is a high-risk investment given the current environment, and downside risk remains to the P&L and balance sheet, we upgrade our rating to Buy following a strong underlying 1H09 result highlighted by prudent management of the group balance sheet and funding position.
"Our EPS forecasts have been cut 12%-15%pa while our TP falls 2% to $35.57, reflecting a 20% premium to our conservative estimate of book value.
"The 1H09 Numbers — Operating income fell 37% to $3.0bn, due largely to $1.1bn in write-downs across the group’s managed funds, co-investments, Italian mortgages, and other loan & trading activities.
"Expenses fell 33% as the bonus pool took a hit, and a low tax rate saw NPAT -43% to $604m.
"Excluding write-downs, operating income fell 13% to $4.1bn and NPAT -6% to $999m.
"Balance Sheet, Funding & Capital OK — The balance sheet retains significantly lower leverage than peers and a positive funding mismatch with term funding ($32bn) ahead of term assets ($28bn), and cash & liquid assets ($26bn) exceeding short-term wholesale funding ($19bn).
"The tier 1 ratio is 11.0% with group capital $3.3bn (or 40%) ahead of minimum regulatory requirements.
"We also view flat 1H09 DPS of $1.45 as a positive signal of group capital needs.
"More Write-Downs Likely — Guidance for 2H09e to be “in line with” 1H09 includes $400m of further write-downs on managed funds.
"However, this excludes marks against MAP and MIG given observable market transactions support current carrying values. We estimate there remains ~$1.1bn of mark to- market losses across the group’s listed managed funds at present."
But at the Mini-Mac wannabe, Babcock & Brown it was a very different market reaction to a company defining announcement.
It revealed its plans to slim, sack staff and try and sell assets to stay alive.
The market reaction was to sell and drive the shares down to a new all time low of 22.5c before closing down 19% at 25c. That’s down some 60% in the past month or so.
Even though it’s a volatile market, investors are not taking seriously claims by the likes of Allco, Centro and Babcock & Brown (BNB) that they have discovered true virtue and want to shift to a new and better business model.
BNB produced all the tricks, a strategic leak to the Australian Financial Review yesterday of a possible big asset sale (it’s best asset, the Dalrymple Bay coal loader in Queensland).
That wasn’t enough when the news from the announcement later in the day was so "iffy".
BNB said it will accelerate job cuts and separate its businesses to avoid defaulting on $3.1 billion of debt (which is what the market was frightened of). Its trying to cut costs by $150 million.
The company plans to cut staff numbers by 63% by 2010 while it renegotiates debt agreements with bankers.
Investors know how hard it is to sell assets with a credit freeze crunching debt and other markets. No one can or wants to buy at the moment. Allco couldn’t and Centro can’t.
B&B announced it would offload its real estate and aircraft operating leasing concerns – businesses it had said it would keep after its August restructure announcement.
Then it announced plans to wind down its structured financing operations.
The latest changes would leave the company solely focused on the infrastructure sector, where it is involved in the development of wind, transport, energy and PPP projects.
However, the company’s management wouldn’t say anything more about the proposed asset sales, and how much Babcock hoped to reap from the sale of its real
