Macquarie Group is a step closer to returning to its profit heyday – before the global financial crisis – after it confirmed on Monday that higher performance fees from listed and unlisted funds would lift this year's earnings above the $1.27 billion booked for the year ending March 31.
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Macquarie expects this year's results to be "slightly up", buoyed by an improved performance in the funds division, and offsetting the realised gain on the distribution of its stake in Sydney Airport. The revised earnings guidance came in a statement to the Australian Securities Exchange and forms part of a presentation by finance chief Patrick Upfold to the CLSA investor forum in Hong Kong.
The funds arm, led by Shemara Wikramanayake, touted as successor to chief Nicholas Moore, becomes the third unit Macquarie expects will post better earnings this financial year. The others are advisory division Macquarie Capital, and the banking and financial services arm.
Monday's statement is an improvement on Macquarie's last update to investors at its annual meeting in July. Previous guidance pointed to the group matching the previous year's earnings.
Macquarie has about $405.1 billion in assets under management, and the funds unit includes Macquarie Infrastructure and Real Assets and Macquarie Investment Management.
Consensus analyst estimates suggest the group will report a full-year profit of $1.35 billion, still shy of its 2008 result of $1.8 billion.
Macquarie said the "short term outlook remains subject to a range of challenges" including market conditions, the strong Australian dollar, and "potential regulatory changes and tax uncertainties". The outlook for its other five operating units remained unchanged.
The floats of Regis Aged Care and Medibank Private are among the large mandates Macquarie has secured.
The company expects the second half to be "moderately up" on the first-half.
The update prompted Credit Suisse analyst James Ellis to lift his earnings estimates by 2 per cent, reflecting an additional $70 million performance fee assumption within the funds unit.
"We expect residual MEIF1 (Macquarie European Infrastructure Fund 1) and other unlisted funds approaching their 10-year life to underpin a continued trend here," he told clients. "Macquarie has reported performance fees every single half since they were first reported 12 years ago."
Analysts at UBS concurred that there were fees from the MEIF fund coming through.
"In recent months, MEIF1 has sold down stakes in APRR (French toll roads) and Arlanda Express (Stockholm airport connection)," they said. "From an accounting perspective it can now 'reliably measure' the fund valuation above hurdles and will start booking performance fees. As the rest of this portfolio is sold down over the next 18 months, further performance fees are highly likely."
UBS also cautioned that the risk of a "rapid selloff" in bonds remained, along with any regulatory or capital changes that could stem from the financial system inquiry.
Macquarie now derives 74 per cent of its income from annuity businesses such as the funds division, and corporate and asset finance. In 2008, that figure was just 32 per cent, the remainder coming from capital markets businesses such as securities, advisory and fixed income, currencies and commodities.
At the AGM, the group singled out its securities unit as a likely dark spot in the full-year earnings, but vowed to retain the volatile business. That is the only unit Macquarie sees as having a lower result this financial year. The other two units expected to be broadly in line with the previous year.
Macquarie shares closed 1 per cent higher at $58.55.
