With 30 per cent of its revenue generated in the Americas, Macquarie Group will benefit from the changes to US company tax rate, and this should help drive its bottom line growth and share price over the next few years, according to a UBS report on the company.
The passage of the US Tax Reform Bill in December, reducing the corporate tax rate from 35 per cent to 21 per cent, will lead of the significant reduction in Macquarie’s overall tax rate, UBS says.
Further enhancing Macquarie’s prospects, UBS says that in recent times there has been an increase in volatility in a number of asset classes, including bonds, oil and gas and commodities. Volatility tends to be a positive for Macquarie’s trading business.
And with the global economy strengthening and business confidence high, Macquarie’s capital markets business should benefit from an expected increase in mergers and acquisitions activity.
“Given the tax changes and improving revenue environment, we have upgraded our earnings per share forecast by 3, 5 and 6 per cent over the next three financial years, respectively,” UBS says.
Macquarie’s revenue growth will be subdued but the company has the potential to improve its operating leverage, the report says. Macquarie has had a cost-to-income ratio as high as 85 per cent in recent years.
There have been improvements. In the first half of the current financial year, Macquarie produced 3 per cent income growth and a 1 per cent reduction in costs. CTI fell to 68.4 per cent, which UBS says was a “pleasing outcome”.
Macquarie’s activities cover corporate and asset finance, funds management, banking and markets.
“The industry outlook is challenging, with limited opportunities to grow revenue. We believe revenue is likely to have peaked for this cycle,” UBS says.
“We believe Macquarie is relatively attractively priced [Friday’s close was $102.04] on a price-earnings multiple of 12.4 times 2018/19 earnings, with a dividend yield of 5.6 per cent (45 per cent franked).”
UBS has set a price target of $110 on Macquarie Group stock. “In the event market conditions continue to be buoyant, interest rates remain low, revenue growth reaches around 5 per cent compound annual growth rate and Macquarie lowers its cost-to-income to around 58 per cent, the stock could trade up to $120,” it says.
Macquarie’s share price has climbed steadily from a low of $64 in February 2016. Its progress was interrupted in June last year but a month later it was back on its growth path.
“Despite the rally in Macquarie’s share price, we continue to see upside. We believe the market will continue to be attracted to its infrastructure management business, as well as operating leverage,” UBS says.