Macquarie flags weaker first half as deal-making slows

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Investment giant Macquarie Group has warned of a weaker first half as a tougher deal environment slows earnings in its flagship asset management business, sparking a slump in its price.

On Wednesday, Macquarie issued an ASX update saying its net other operating income would be “substantially down” in the first half, mainly due to lower investment-related income from green energy investments.

Macquarie chief executive Shemara Wikramanayake noted in July that deal activity had slowed.Credit: Elke Meitzel

The company said asset sales were mostly expected to occur in the second half, impacting the short-term outlook of its asset management arm, which is a major source of profit for Macquarie.

At the group’s annual meeting in July, chief executive Shemara Wikramanayake said deal activity – the buying and selling of assets – had slowed because of a number of factors, but Macquarie’s most recent update was below market expectations.

Shares in Macquarie closed 3.8 per cent lower to $170.21 a share on Wednesday, although investors and analysts said it was largely a reflection of the trading environment.

TMS Capital portfolio manager Ben Clark said the news from Macquarie was not significant, especially amid a patchy pickup in merger and acquisition activity this year.

“It’s not a big deal, and it’s not unexpected,” he said. “We all know corporate deals and M&A activity has been very slow this year, and dead last year.”

Macquarie was a “patient investor”, Clark said, and was unlikely to be in a rush to sell given the quality of its assets and selling conditions globally.

“Macquarie owns some great assets, especially in recycling, and they’re not in a position where they need to hurry,” he said.

“You want some competitive tension when selling assets, and we know financing conditions globally are tight, and debt funding has become more expensive and harder to source. Macquarie has a lot going on in Europe, especially in its green infrastructure division, and conditions there are even tighter than they are in the US.”

While Macquarie shares fell on Wednesday, Clark said the company’s update was “more a timing thing” and that given the broader Australian sharemarket’s performance over the day, the share price movement was to be expected.

“What Macquarie basically said was that some of the assets they were going to sell this half of the year will be sold in the next half,” he said. “When markets are down 1 per cent, Macquarie’s share price comes down a couple per cent because they’re leveraged.”

Citi analyst Brendan Sproules said Macquarie’s announcement showed the company would face a softer first half than expected but that unlike July’s annual general meeting, the group’s current full-year performance metrics had been left unchanged.

However, he noted Wednesday’s release “indicated that Macquarie Asset Management’s realisations will predominantly appear in the second half rather than the first half”.

Sproules said he expected consensus cash earnings for the first half to be revised down to about $1.6 billion from $1.9 billion as the result of a “tougher environment for deal flow”, which had already led to full-year downgrades for the Macquarie Asset Management and Macquarie Capital businesses this year.

Morningstar analyst Nathan Zaia said Macquarie’s update could result in some analysts lowering their first half profit results for the company, but that it largely looked to be about timing of asset sales rather than a material change. “It’s nothing alarming from our point of view,” he said.

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