HI5002 Company Performance Analysis: Macquarie Group Assessment Answer
As a group of investment analysts who work for an investment consulting firm based in Australia, the following report provides a comprehensive financial analysis for an Australian publically listed company.
The objective is to provide investment recommendation to a large investor overseas. The company selected for the purpose is the Macquarie Group Limited which is a large group in Australia.
The report will provide overview of the company, its operational segments and its key performance parameters from 2016 till 2018. For this purpose, key ratios analysis will also be performed. Additionally, a sensitivity analysis will also be done.
Basis the above analysis, conclusion and recommendation will be drawn for the purpose of investment in the Group.
The following pages present a financial analysis of the Australian company Macquarie Group Limited on behalf of the Group XXX. The objective is to provide financial and investment advice to investor XXX from XXX. Hence, the report will provide a comprehensive analysis of the company, including the core business of the company, operations, its performance during three years from 2016 till 2018, performance basis various key ratios as well as the trend analysis, sensitivity analysis, dividend policy, risk analysis, thereby, to provide an overview of the company’s investment prospects.
The key performance ratios that will be covered are: (i) Profitability Ratios which indicate the margins and profitability of the company on year-on-year basis, (ii) Efficiency Ratios which indicate the level of efficiency with which various resources are being utilized in the company. These are famously also known as Turnover Ratios, (iii) Liquidity Ratios which indicate the level of liquidity (mainly cash level) of the organization. These ratios are important as at any time a company may be required to discharge some liabilities or meet some urgent expenses for which liquidity plays a crucial role, (iv) Leverage Ratios which indicate the leverage or debt level in the capital structure and how well the organization is insulated from the impact of fixed obligations that come along with the debt and (v) Investment Ratios which indicate various parameters that an investor or a prospective investor will be interested in such as the dividend pay-out ratio and earnings per share etc.
Basis the above analysis of the Macquarie Group, a conclusion would be formed regarding the financial state of the company, various parameters on which it is doing very good and issues or concerns that can be seen currently or in nearby future. This conclusion will form the basis for recommendation to investor XXX regarding the investment in Macquarie Group limited and linked risks.
Financial Analysis of the Company
(i) Description of the Company
As discussed above, the selected company is Macquarie Group (ASX: MQG) which is headquartered in Sydney, Australia and was founded in 1969. The company is involved in the business of providing investment banking and financial services and currently employs around 14,500 employees across 25 countries. A total of AUD 497billion assets were under management of the group as of 31st March, 2018, an increase of almost AUD 15billion over previous period.
As of March 2018, the group reported total assets of AUD 191.3billion with equity of AUD 18.2billion. The company reported a net profit of AUD 2.6million for the year which is an increase of 15% over previous year. In fact, the company has reported profits continuously for 49 years, which is a record in itself. The Return on Equity for the period was reported at 16.8%, an increase over 15.2% in previous period.
The numbers above indicate that the company has been doing well with various businesses such as, Macquarie Asset Management, Corporate and Asset Finance, Banking & Financial Services, Commodities and Global Markets segments all contributing to the organization’s growth. The Company has even been able to sail through difficult economic times with record profits through the contribution of various segments and unmatched expertise of the Company.
As discussed above, the subject Company is a financial group that is involved in the variety of financial services such as, advisory, baking, financial solutions and risk / capital solutions. The main operating segments and their contribution to Net Profit of the company can be seen as below (the first three segments together are known as ‘Annuity-Style Businesses’ while the last two segments are together known as ‘Capital Markets Facing Businesses’):
- Macquarie Asset Management: The segment is further divided basis the sector, such as Infrastructure and Real Assets, Investment Management, and Specialised Investment Solutions. The group is worldwide leader in this segment, especially in alternative asset management, such as, infrastructure, agriculture, real estate etc. The group also offers multiple solutions across debt and equity markets.
- Corporate and Asset Finance: The segment is further divided into Asset Finance and Principal Finance. Asset Finance provides customised asset management solutions in variety of sectors. Principal Finance provides customised financing solutions in primary and secondary markets globally.
- Banking and Financial Services: This segment is operational in Australian market only and is further divided into Personal Banking, Wealth Management and Business Banking. Personal Banking segment provides retail banking products to its clients. Wealth Management segment provides cash management services, investment products and advisory services to its clients. Business Banking segment provides lending solutions to its customers. This segment mainly caters to business clients and professional firms.
- Commodities and Global Markets: This segment provides comprehensive solutions in global markets to clients who need these solutions in any market, equity shares, commodities or fixed income markets. This segment is further divided into seven divisions based on the type of market, such as, equity, commodity, fixed income, cash, credit etc.
- Macquarie Capital: This segment is involved in providing capital market advisory services to such corporate, institutional clients and government etc. who are involved in transactions such as, mergers and acquisitions, fund raisings, restructuring etc.
(ii) Calculation and Analysis of Selected Performance Ratios
As discussed earlier, we will be calculating major performance ratios under following five heads:
- Profitability Ratios indicate the margins and profitability of the company on year-on-year basis. The Return on Equity ratio for the Group has improved consistently on year-on-year basis. The ratio was at 13.8% in 2016, 14.4% in 2017 and 15.8% in 2018. Net Interest Margin indicates the interest income earned with respect to the earning assets of the bank. The ratio improved slightly in 2017 but has again declined in 2018. The ratio was at 1.53% in 2016, 1.54% in 2017 and 1.45% in 2018.
- Efficiency Ratios indicate the level of efficiency with which various resources are being utilized in the company. These are famously also known as Turnover Ratios. In case of given Company, we can calculate the efficiency ratio by dividing operating expenses excluding interest expense by net operating income. This indicates the control over expenses with respect to income earned. The ratio has declined consistently indicating that the Group is becoming more efficient with respect to expenses. The ratio was at 70.3% in 2016, 70.1% in 2017 and 68.3% in 2018.
- Liquidity Ratios indicate the level of liquidity (mainly cash level) of the organization. These ratios are important as at any time a company may be required to discharge some liabilities or meet some urgent expenses for which liquidity plays a crucial role. The current ratio as well as the quick ratio for the Group has consistently declined over the period, indicating reduced liquidity. However, the current levels seem sufficient and hence, may indicate better utilization of available liquidity. The current ratio was at 1.16 in 2016, 1.01 in 2017 and 0.96 in 2018. The quick ratio was at 0.62 in 2016, 0.52 in 2017 and 0.36 in 2018.
- Leverage Ratios indicate the leverage or debt level in the capital structure and how well the organization is insulated from the impact of fixed obligations that come along with the debt. The debt ratio in capital structure of the group is high at 0.77 in 2018. However, the ratio has been declining since 2016 which indicate a positive trend as heavy reliance on debt is risky. The ratio was at 0.82 in 2016, 0.77 in 2017 and 0.77 in 2018. With the decline in debt and improvement in profit, the interest coverage ratio has also improve dover the period indicating better buffer to absorb debt interest related expenses. The ratio was at 1.95 in 2016, 2.05 in 2017 and 2.17 in 2018.
- Investment Ratios indicate various parameters that an investor or a prospective investor will be interested in such as the dividend pay-out ratio and earnings per share etc. The dividend pay-out ratio is high but stabilises in 2018. The high ratio indicates that major part of profits is paid as dividend instead of ploughing back into the business. The ratio was at 0.58 in 2016, 0.65 in 2017 and 0.64 in 2018. At the same time, the earning per share has improved due to high profits. The EPS (cents) was at 619.2 in 2016, 657.6 in 2017 and 758.2 in 2018.
(iii) Cash Management Analysis
Looking at the Balance Sheet of the Company, we can see that the liquid assets include Trading portfolio assets, Derivative assets and Investment securities available for sale. These assets classes formed 26.9% of total assets in 2016, 25.1% in 2017 and 18.1% in 2018. Hence, it can be seen that liquidity is slowly reducing for the Group as the Group tries to allocate its resources in the most profitable and efficient manner.
Through the Cash Flow Statement, we can see the ending cash balance was AUD 14.3million in 2016, AUD 11.8million in 2017 and AUD 13.0million in 2018.
Hence, the cash flow seems to be stable and improved slightly in 2018 despite major financing activities in 2018 out of which dividend pay-out was the largest cash outflow. The increased cash flow from operating activities could assist in taking the burden of increased investment and financing activities in 2018.
(iv) Sensitivity Analysis
A sensitivity analysis was performed for the Group, assuming a hypothetical new project whereby a product is launched. The timeframe is 4 years with certain assumptions as available in Appendix. The four scenarios were created in order to see the sensitivity of net present value of the project. These can be summarised as follows:
|Current Values:||Unit Sales decrease by 10%||Price per unit decreases by 10%||Variable Costs increases by 10%||Fixed Cost increases by 10%|
It can be seen that maximum NPV is at current assumed values at $3.03 million. The next closest NPV occurs at the assumption where fixed cost increases by 10%. The NPV is $29.7 million. The lowest NPV occurs when the unit price falls by 10% when NPV stands at $17.02 million.
Hence, we can see that the scenario is least sensitive to changes in fixed cost and most sensitive to changes in price per unit. The scenario is also reasonably sensitive to changes in variable cost and number of units sold.
(v) Systemic & Unsystemic Risks
The group has a robust risk management system which is a part and parcel of each group and division within the organization. This helps the organization to sail through the worst times and minimise disruptions as far as possible.
The Group also takes a conservative approach such that it has been able to report profits for 49 consecutive years irrespective of the global economic conditions. Further, the business is well-diversified across segments as discussed earlier such that it is able to deliver consistent results.
Apart from these measures, the Group boasts of deep expertise in the field combined with knowledge of the nuances of local markets such that it has been able to become a leader in many areas.
The Group continues to remain dynamic by pursuing relevant and organic growth opportunities.
However, despite all of these, the Group remains exposed to multiple risks which are systemic as well as unsystemic.
The Group cannot control market conditions or economic conditions of a market which is bound to impact the Group’s numbers. Similarly, the exchange rate of Australian Dollar against major currencies is another major risk. Due to large portion of income being in foreign currencies, this risk prevails although the Group makes efforts to hedge it to the maximum extent possible. Additionally, any regulatory changes related to the area of business in domestic or international environment may impact the Group adversely (or favourably).
Further, there are certain types of risks that arise due to nature of business despite all the risk management procedures. For example, the Group is exposed to risks of wilful misconduct by employees, cyber-crime, information and data security related risks, liquidity risks due to increased cost of financing, operational risks etc.
(vi) Dividend Pay-out Ratio & Dividend Policy
The Company has been paying very high dividends which is a delight for the shareholder but may indicate limited growth opportunities. Instead of heavy reliance on debt, equity funds can be ploughed back into the business. Further, the high dividend pay-out also creates expectations and unnecessary burden on the company to pay even higher dividends. Ultimately, this is a loss for the equity shareholder in the long run as the dividends paid out could have been utilised in a better way to earn larger profits for them.
However, over the period, the Group seems to be reducing the ratio slowly.
Recommendation Letter & Conclusion
It can be seen from above analysis that the Macquarie Group is one of the oldest and most experienced organizations in the field of financial and banking services. The Group has wide and extensive experience in various types of markets, be it based on geography or the type of security or the type of solution required by customer. The organization is leader in providing customised solutions in a variety of sectors such as real assets, real estate, infrastructure etc. Apart from this, it also provides banking services in Australia.
Hence, the group is well diversified such that it can absorb multiple types of risks and continue to provide good refutes to its stakeholders. This is clearly evident in the fact that the organization has reported profits for 49 consecutive years which is a record in itself. The group has reported profit even when the global economic scenario was not particularly upbeat indicating the strength of the Group.
Further, the Group keeps focus on organic growth opportunities such that it can avail these opportunities to provide magnified benefits to its stakeholders.
The results are evident in high dividend pay-out ratio and consistently increasing earnings per share. The Return on Investment ratio also indicates increasing trend which is a positive sign. The performance ratios as analysed above also indicate good control over expenses and increased profits trend. The group is able to utilize and appropriate its resources in an efficient manner. The debt is on the higher side but shows a declining trend over the period with increased interest coverage which indicates that the group is aware about the same.
Hence, it is recommended to include the above discussed company, The Macquarie Group Limited in the investment portfolio as it is expected to enhance the value of your portfolio.
|Interest and similar income||5,461||5,138||4,943|
|Interest expense and similar charges||-3,182||-2,953||-2,957|
|Net interest income/(expense)||2,279||2,185||1,986|
|Fee and commission income||4,862||4,331||4,670|
|Net trading income||2,067||1,758||1,957|
|Share of net profits of associates and joint ventures||880||921||935|
|accounted for using the equity method||4||51||241|
|Other operating income and charges||66||1,118||1,131|
|Net operating income||10,158||10,364||10,920|
|Brokerage, commission and trading-related expenses||-892||-852||-830|
|Non-salary technology expenses||-587||-644||-604|
|Other operating expenses||-1,023||-993||-1,127|
|Total operating expenses||-7,143||-7,260||-7,456|
|Operating profit before income tax||3,015||3,104||3,464|
|Income tax expense||-927||-868||-883|
|Profit after income tax||2,088||2,236||2,581|
|(Profit)/loss attributable to non-controlling interests:|
|Macquarie Income Securities||-16||-15||-14|
|Macquarie Income Preferred Securities||-1||0||0|
|Other non-controlling interests||-8||-4||-10|
|Profit attributable to non-controlling interests||-25||-19||-24|
|Profit attributable to ordinary equity holders of Macquarie Group Limited||2,063||2,217||2,557|
|Basic earnings per share||619||658||758|
|Diluted earnings per share||600||645||744|
|Receivables from financial institutions||33,128||27,471||38,559|
|Trading portfolio assets||23,537||26,933||15,585|
|Investment securities available for sale||11,456||6,893||6,166|
|Loan assets held at amortised cost||80,366||76,663||81,150|
|Other financial assets at fair value through profit or loss||1,649||1,502||1,434|
|Due from subsidiaries||0||0||0|
|Property, plant and equipment||11,521||11,009||11,426|
|Interests in associates and joint ventures||2,691||2,095||4,055|
|Investments in subsidiaries||0||0||0|
|Deferred tax assets||850||638||650|
|Trading portfolio liabilities||5,030||5,067||8,061|
|Payables to financial institutions||23,860||17,072||15,440|
|Due to subsidiaries||0||0||0|
|Debt issued at amortised cost||63,685||50,828||53,717|
|Other debt issued at fair value through profit or loss||2,672||2,404||2,363|
|Deferred tax liabilities||543||621||749|
|Total liabilities excluding loan capital||1,75,882||1,59,859||1,67,753|
|Total capital and reserves attributable to ordinary equity holders of Macquarie Group Limited||15,116||15,563||16,357|
Statement of Cash Flows
|Cash flows from/(used in) operating activities|
|Interest and similar income received||5,455||5,161||4,908|
|Interest expense and similar charges paid||-3,125||-2,843||-2,940|
|Fees and other non-interest income received||226||4,484||4,405|
|Fees and commissions paid||4,961||-909||-877|
|Operating lease income received||-835||1,607||1,831|
|Dividends and distributions received||1,541||209||228|
|Employment expenses paid||-2,114||-3,885||-3,913|
|Operating expenses paid||-2,065||-1,401||-1,836|
|Income tax paid||-4,102||-723||-483|
|Changes in operating assets and liabilities:|
|Net receipts from trading portfolio assets and other assets/liabilities||-1,178||3,901||3,937|
|Net movement in deposits||1,056||5,561||1,499|
|Net movement in debt issued at amortised cost||-972||-12,303||2,500|
|Net movement in payables to financial institutions and other borrowings||-1,013||-4,259||182|
|Net movement in loan assets and balance with related entities||314||1,012||-3,610|
|Net margin money paid||15,359||-1,104||-184|
|Net payments for assets under operating lease||-685||-320||-1,202|
|Life investment linked contract premiums received, disposal of investment assets and other unitholder contributions||12,823||1,181||1,104|
|Life investment linked contract payments, acquisition of investment assets and other unitholder redemptions||-2,406||-1,077||-1,099|
|Net cash flows from/(used in) operating activities||1,897||-5,708||4,450|
|Cash flows (used in)/from investing activities|
|Net proceeds from investment securities available for sale and financial instruments designated at fair value||-14,580||3,212||111|
|Proceeds from the disposal of or capital return from associates, subsidiaries and businesses, net of cash deconsolidated||34||2,869||3,510|
|Payments for the acquisition of associates or capital contribution, subsidiaries and businesses, net of cash acquired||-183||-2,619||-4,224|
|Proceeds from the disposal of property, plant and equipment, and intangible assets||-15,238||0||58|
|Payments for the acquisition of property, plant and equipment, and intangible assets||530||-329||-255|
|Net cash flows (used in)/from investing activities||120||3,133||-800|
|Cash flows (used in)/from financing activities|
|(Payments for)/Proceeds from non-controlling interests||1,503||1,160||-33|
|Proceeds from the issue of loan capital||-718||980||0|
|Payments on redemption of loan capital||-82||-221||-330|
|Dividends and distributions paid||-1,228||-1,477||-1,663|
|Payments for treasury shares||-363||-433||-373|
|Net cash flows (used in)/from financing activities||-238||9||-2,399|
|Net increase/(decrease) in cash and cash equivalents||-2,653||-2,566||1,251|
|Cash and cash equivalents at the beginning of the financial year||16,973||14,320||11,754|
|Cash and cash equivalents at the end of the financial year||14,320||11,754||13,005|
|Net Interest Margin||1.16%||1.19%||1.04%|
|Acid Test Ratio||0.62||0.52||0.36|
|Interest Cover Ratio||1.95||2.05||2.17|
|Dividend Payout Ratio||0.58||0.65||0.64|
|Sales price per unit||$20.00|
|Cost per unit||$12.00|
|Fixed Annual Cost||$3,00,000|
|Investment in fixed assets||$20,00,000|
|Income tax rate||30%|
|– Depreciation expense||$4,50,000||$4,50,000||$4,50,000||$4,50,000|
|Annual Net Cash Flow Estimates||0||1||2||3||4|
|Investment in fixed assets||-$20,00,000||$2,00,000|
|CF due to change in net working capital||-$6,00,000||$6,00,000|
|Add back depreciation||$0||$4,50,000||$4,50,000||$4,50,000||$4,50,000|
|Net cash flows||-$26,00,000||$16,05,000||$16,05,000||$16,05,000||$24,05,000|