Mispricing on Macquarie Group presents ‘buying opp’ for long-term believers
Given that nothing demonstrable has altered the otherwise robust outlook for Macquarie Group (ASX: MQG), the massive sell down experienced by the global financial services provider’s share price, now trading 19% below its 12 month high of $85.15 mid-July last year, a near-30% discount to its target price of $95 – plus a 1.20% discount to its intrinsic value – represents a rare opportunity to buy the stock while it’s exhibiting a significant pricing mismatch.
When compared with the 8.7% fall in the broader share market since the start of the year, Macquarie Group’s 30% share price tumble over the same period looks decidedly unwarranted, especially with most of its revenue coming from stable, annuity style businesses that are less exposed to equity markets.
The stock is now trading at a 10.2 times 12-month forward price-earnings multiple, considerably lower than its pure asset management and diversified financial peers.
This is fairly extraordinary for an investment grade stock like Macquarie Group, which is expected to continue delivering more of the exceptional earnings per share (EPS) growth that investors have come to expect of the stock over the last five years.
EPS is expected to grow from $5.91 in 2016 to $5.97 and $6.26 in 2017 and 2018 respectively, while return on equity (ROE) is expected to remain at around 13% over the next three years; and dividend yield is forecast to remain between 5.5% and 6%.
While Macquarie Group is seen by many as a ‘cash and growth’ play – with Macquarie Infrastructure and Real Assets (MIRA) now the largest source (96%) of performance fees for Macquarie Group – what’s particularly appealing about the stock’s long-term growth upside is that it has a lot more diversification within its income than just its asset management business.
The company’s global funds management business is arguably driving its returns, with Macquarie Asset Management among the largest asset management businesses in the world, managing $487 billion globally.
But more diverse earnings sources include its leasing operations and its capital markets business, and the company is continuously expanding into new growth markets.
As a case in point, a Macquarie Group-led consortium recently launched a second takeover bid for listed property software tiddler, Onthehouse Holdings Limited (ASX: OTH).
While the Macquarie Group is typically linked to multibillion-dollar bids in infrastructure and other sectors, the play for Onthehouse Holdings – which has a pre-bid market capitalisation of less than $50 million – suggests it’s prepared to drill down into small-cap markets when it sees sufficient value to warrant doing so.
Having traded well under its 2011 listing price of $1 for all of 2015, Onthehouse has been under pressure to revive its underperforming online services arm that offers free property information on its website onthehouse.com.au, and this clearly where Macquarie Group plans to weave its magic.
Macquarie Group was also an early backer of national online property transfer company Property Exchange Australia which is expected to list within the next 18 months.
Buying at current levels should appeal to investors with a long-term view on the stock, but further short-term weakness is likely.