3 golden tailwinds for the silver doughnut

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Macquarie has defied the sceptics in recent years and outperformed the financials index by another 14% over the last 12 months. One fundie that has been calling it right is David Poppenbeek at K2 Asset Management, who has it as the fund’s biggest position by far.

After making the case for the silver doughnut on Livewire earlier in the year, we sat down with David again recently and asked him for an update. In this interview, he laid out the three key drivers of the stock’s continued success. These included 1) A rotation of capital from mature to earlier-stage, higher-return assets; 2) Growth in traditional banking; and 3) Improving productivity. Watch the clip, or read the transcript, for the full story.


When we last spoke with Livewire about Macquarie Bank; the stock was around $125 back then, and we could see a pathway to $150 quite comfortably. 

Since that time, Macquarie's done a capital raising, they raised about $1 billion to take advantage of opportunities in the global market, and they also gave guidance. 

Now one of the things that we've learned over the journey is that Macquarie is a classic under-promiser, over-deliverer, and sure enough with their most recent guidance, they suggested to the market that it was likely that their profits next year would be lower than last year. 

We don't worry about that. We believe that there's enough fuel in the tank to drive from Macquarie way higher. It's currently trading at around $137 but just paid in excess of $2 in dividends. We believe that Macquarie is doing all the things that they should be doing at the moment.

There are probably three main drivers. 

The first one is that they can rotate their capital, and that's what they're doing. Macquarie's basically rolling out of a lot of their mature assets, assets they probably started acquiring 20 years ago. As interest rates have fallen, as these assets have matured, they've become just income producers. 

So from a Macquarie's perspective, this is the time to harvest those assets. The mature income-generating low-growth type assets really deserve a different owner. So Macquarie is seemingly happy to pass those assets onto income orientated acquirers and rotate in to far higher IRR type businesses, and these are more development assets. 

These assets have double-digit internal rates of return. These assets are way more interesting. Macquarie is really focused on the green movement, and that requires a lot of development, requires a lot of skill, and that's what Macquarie brings to the table, and I think they're a first mover there, so they're throwing a lot of capital at that space. They've got a lot of expertise in that space, and we believe that's the smart move.

The second driver for Macquarie, we believe is just the traditional banking, and Macquarie's generating a lot of deposit growth here in the Australian market. That deposit growth can allow Macquarie to actually lend to, you know, plain vanilla mortgages. That's not a bad return on risk-weighted assets. We believe that with the state of the local banking environment, with the major banks under all sorts of pressure, Macquarie can continue to win market share quite comfortably without sacrificing margin. So we think that that's the second driver.

The final thing is efficiency. 

There's little doubt that there are more technological advances that can happen in investment banking. Macquarie is known to be at the forefront of using technology, and we believe that there are more inroads there for Macquarie. The other thing is, is that given the size and maturity of Macquarie's business model, it's less people hungry. Now, traditionally investment banking has been about people. If you go back maybe 25 years ago, Alan Moss used to always say that the biggest asset for Macquarie goes up and down in the elevator each day. 

What's really interesting that over the last decade, Macquarie's assets are grown by 40% but the headcount hasn't moved. So that's an insight that Macquarie is getting more experienced. Their people are obviously of enormous calibre, and it becomes more productive. If you can get more out of each person, then ultimately that's what productivity is all about.

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