Cashed up Macquarie holds profit and dividend line as shares recover


February 2, 2010

Dear Mayne Reporters,

Greetings from the Qantas club at Brisbane Airport ahead of this morning's first ABC Learning creditors' meeting at a joint called Gianni's at Portside in the nearby suburb of Hamilton. More on that later. First up today, Macquarie Group has just unloaded its six monthly deluge on the market as follows:

4 page statutory summary of profit
6-page press release
42-page formal financial accounts
70-page management discussion
104-page slide presentation

And the news looks pretty good with the Macquarie Model of staff alignment holding up well, sending shares in the bank up 6% on the open in a weaker overall market.

The headline net profit was down 43% to $604 million, primarily because staff costs almost halved from $2.42 billion in the September half last year, to just $1.265 billion in the latest period.

The tax man is also sharing the pain as Macquarie has only provided for $44 million, compared with a healthier $273 million 12 months ago.

Whilst profits are down, the Millionaire Factory has bunkered down for a brutal and prolonged credit crisis, lifting cash reserves from $10.5 billion to $25.6 billion over the past 12 months. It's not quite the $66 billion held by CBA, but that's still one hell of a cash pile. The government guarantee on deposits has also turned around what many thought was a mini run on the bank because deposits rose from $13.2 billion to $16.7 billion over the past six months.

The much-anticipated write-down of $1.14 billion materialised, but the bottom line impact was only $395 million because the tax man and staff bonuses share in the hit.

However, we haven't seen complete mark to market accounting on the various plunging infrastructure satellite funds because the full year guidance assumes an additional $400 million write-down to current prices.

Still ripping out outrageous performance fees

Whilst base fees on the funds were slightly down, somehow the performance fees jumped 30% to $219 million. As an investor in every listed Macquarie fund, I haven't seen any sort of performance to justify that little gouge. Maybe CEO Nicholas Moore can explain it to analysts and journalists when he faces them at midday after they've digested the 226 pages of information that was released. Hang on, we've found an explanation:

"Performance fees increased on the prior corresponding period to $210 million. A significant contributor was the performance fee on the termination of the Advisory Agreement with Bristol Airports Bermuda Limited (formerly Macquarie Airports Group Limited). Other performance fees included $27.1 million from the DUET Group."

MAP shares have plunged from $4.40 to $1.94 over the past year and DUET shares have crashed from $3.10 at the end of September to last night's close of $2.20. But that doesn't change the great performance up until September 30, of course. As long as the Millionaires Factory keeps gouging more undeserved "performance fees" from their investors, the capital strike on their conflicted and appallingly governed third party management model will remain in place.

The Mayne Report is preparing a big list comparing the claimed net assets of companies against their market caps and we'll be writing to auditors over the coming weeks asking them to justify their positions ahead of next year's interim profit reporting season. Here are two examples:

Macquarie Airports: Claims net assets of $6.2 billion when market cap is $3.3 billion. EA Barron from PwC is the auditor.

Macquarie Infrastructure Group: claims net assets of $6.68 billion when market cap is now down near $3 billion. Wayne Andrews from PwC is the auditor.

As John Durie noted in The Australian today, shares in the internally managed Transurban have rocketed 33% since slashing debt and distributions on June 20, whilst the market has fallen 29% and Macquarie Infrastructure Group shares 43% over the same period. That, of course, didn't stop a ridiculous $27 million in base fees leaking to the Millionaires Factory from MIG over the past six months.

Banking and finance plunges to loss

The segment break-down saw the banking and finance division plunge to a loss after the dramatic increase in wholesale funding costs and the $197 million write-down after selling the Italian mortgages business.

However, the loan book held up reasonably well with only an additional $135 million of provisions for the half-year, so clearly the Millionaire Factory was far more prudent than the likes of Suncorp in avoiding backing too many teetering property developers.

Macquarie Capital leads the way

The giant Macquarie Capital division, which includes the traditional advisory and underwriting business plus the specialist funds, produced both the biggest contribution to profit and the biggest drop.

Check out slide 7 to see how underwriting and advisory income plunged from an astonishing $850 million in the September 2007 half to a more modest $548 million in the latest period. Combine that with the $548 charge against investments in the listed funds and that explains the overall Macquarie Capital contribution plunging from $1.56 billion to just $348 million.

The write-downs were explained as follows:

Impairment charges on equity investments were $548 million for the period. These charges related to the write-down of holdings in listed securities of $293 million (including Macquarie Communications Infrastructure Group, Macquarie Infrastructure Company, Macquarie International Infrastructure Fund and Macquarie Media Group), certain held for sale and equity accounted investments ($206 million), and the write-down of the US portfolios of asset-backed securities held as available for sale ($48 million) reflecting a decline in value.

Holding the line on dividends as options disappear

With $25.6 billion of cash available, albeit most of it borrowed of course, Macquarie can easily fund its final dividend of $1.45-a-share which is franked to 80% and will be paid on December 19. This largely explains why Macquarie shares rebounded $1.75 or 8.5% to $22.35 in early trade this morning after hitting a 6-year low yesterday on fear of the unknown.

Whilst the bonus-starved staff will welcome this cash flow on their shareholdings, it was interesting that a whopping 52 million options plunged to be out of the money over the past six months. That's more than $2 billion in equity contributions that probably now won't be made by the 13,000 Macquarie Bankers, many of whom are wondering about their careers in the new reality of a credit constrained world that doesn't much fancy enriching financial engineers.

Little mention of BrisConnections

Despite the BrisConnections debacle, we still got this little boast on the advisory work won by the bank: "BrisConnections IPO – Macquarie advised a Macquarie co-sponsored consortium on its successful $5 billion bid for and subsequent Initial Public Offer of Airport Link."

Surely success in these things should not be judged by merely winning a tender. Especially when you left holding an underwriting liability of more than $300 million that is now coming home to roost with the stock at 0.1c and increasingly controlled by parties who won't be able to make the next $1 payment due in May.

However, some of these losses are being recognised: "The net trading loss of $69 million for the six months to 30 September 2008 included a mark-to-market write-down of $27 million in relation to the holding in BrisConnections, which is reported as Other financial assets at fair value through profit or loss on the balance sheet."

Presumably we'll learn more about BrisConnections at this afternoon's briefing.

That's all for now.

We'll be back with more this afternoon.

Do ya best, Stephen Mayne

* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.