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Article Excerpt
RICHARD SHEPPARD, DEPUTY MANAGING DIRECTOR, MACQUARIE GROUP LIMITED: Good morning, everybody, and welcome to the Macquarie Group Interim Results Presentation. My name is Richard Sheppard, the Deputy Managing Director of the Macquarie Group. If I could at the outset just ask everybody, particularly here in Sydney, to turn off your mobile phones so that all the electrical equipment will work.
The format this morning is that Nicholas Moore will shortly give an overview and outlook of the result and he will be followed by Greg Ward, that will talk about the financial details. Let me also introduce sitting down in the front row a number of our Group Heads, Michael Carapiet, the Head of Macquarie Capital is here; Kim Burke, the Joint Head of Macquarie Securities Group; Steve Girdis, the head of Real Estate Group and Nick Minogue, Head of Risk Management Group.
In the audience, as usual, we have analysts and investors here in Sydney. We have a video conference from Melbourne, which those of you in Sydney will see on the screen during the question period, and we are joined by teleconference participants from locations around the world. The Press have been invited to participate but will not, as this is an analysts' conference, will not be able to ask questions during the question period. Hopefully everybody here will have received the information pack, which is available outside the room and which has been released to the Stock Exchange this morning.
The format this morning, as I have mentioned, is that Nicholas and Greg will speak and we will then have a question period after that and we will take questions from Sydney and from the teleconference and from the video conference and we will rotate those. So, once again, welcome and let me now introduce Nicholas.
NICHOLAS MOORE, GROUP HEAD, MACQUARIE CAPITAL, MACQUARIE GROUP LIMITED: Thanks, Richard, and thank you everybody for coming here this morning to listen to our results presentation for our first six months. Just going through the presentation I've got a bit of an overview, as Richard said, of the results and some comments on outlook and then Greg will follow me with more detail.
The first slide, just a bit of data about Macquarie, obviously most of you are familiar with. The second slide, unprecedented global market turmoil, I think for the last 14 months I think we all have experienced really unprecedented market conditions. When bankers get together they-- one of the questions every banker is asking, or seems to ask each other, is have you ever seen anything like this before? And, of course, the natural reaction is of course I actually haven't seen anything like this before and when you actually look at the statistics coming through actually it would indicate that we have been through an exceptional period.
If you look at things like our volatility in the equity markets, whether it be ASX, the Japanese market, the US market, of course it's at all time highs. If you look at the volatility in the foreign exchange markets, of course, all time highs. Actually it's been doubled the highest rate that we've seen previously. So across all the markets we've been operating in, even when you get down to markets like the freight market, we've seen freight rates fall in some markets by up to 98%, 96-98%, so plainly unprecedented market conditions coming from, as we know, a lack of confidence within the banking system that started last August and continued to drain out of the system month-by-month until it finally reached a peak in September with the collapse of Lehman.
Now, as we know, as a result of the collapse of Lehman, we've seen very decisive action taken by governments across the world. Governments have stepped up and injected capital into the banking system. They've actually proved guarantees to the banking system around the world and we've seen coordinated monetary policy easing with interest rates and liquidity being injected into the system. Now, as a consequence of that, we're actually feeling our thaw is actually coming through the banking markets with a sensing of thaw coming through to the banking markets but it's still probably too early to say that for most of the other markets.
Overall throughout this period though, as we know the Australian banking system, although it's been impacted, has remained at sound and has actually benefited from a very good regulatory framework to date. And over the period, of course, Macquarie has remained profitable and well funded.
Now turning to the result itself, the actual result itself, as you know, is AUD604 million. That has been struck in unprecedented global market conditions and has been struck after substantial write-downs across a whole range of our businesses. Now importantly, one of the main categories of write-down we're going to talk about in a second is the area where we've invested alongside our clients. Co-investment with our clients is a key part of the Macquarie strategy. Alignment of interests is always something that we're very, very focused on and so, as some of these write-downs, which I will detail in a second, have come from actually writing down the value of these assets. Important to note that these assets are tangible assets, they're often critical assets in many, many countries and any actual underlying assets generally are performing line with market expectation. So the write-down of those assets, which I will detail, reflect that what's happened to the listed market rather than necessarily what's happening at the asset level.
Throughout the period Macquarie has maintained a strong capital position and we still have a strong capital position today and I'll detail that. Throughout the period as well we've had a strong funding position and I'll detail again our strong funding position. We continue to be conservatively geared and Greg will detail our gearing relative to our peers. And, importantly, Macquarie is all about adapting our business and changing and we're continuing to change the business how we regard to current market conditions.
In terms of the dividend, the Board has decided to maintain the interim dividend at AUD1.45, which is consistent with last year. Our return on equity for the half is about 13.9%. Now that, of course, is substantially down on prior periods but in the circumstances it's not a bad result. The employment expenses, as you can see, are down 48% driven by significantly lower profit share. You'll see the compensation ratio has fallen to 40%, down from approximately 48% in prior corresponding periods.
The next chart we have in our pack actually deals with the comparison of this half versus prior periods and, as you know, it's down substantially on prior corresponding periods. You'll see that property is down 43% on prior corresponding period. We've also provided a comparison with the immediate preceding period given obviously both these periods have taken place within this period of financial crisis. We're down 19%, as you'll see there, in terms of the immediate period that we are looking at.
Earnings per share are down further than that you'll see at 46%. That, of course, reflects the extra capital that we've raised over the period. Dividend per share, as I've mentioned before, is in line with prior year. Our funds under management as of 30 September are up, are up over the period. They're up for two reasons. Number one is the we've actually raised more money, as you'll see there. Secondly, they're up because of the impact of the Australian dollar falling, has offset the fall in the listed value of the investments. So because of that we're-- overall we're up.
The profit obviously has been struck after substantial write-downs. We think we've been very conservative in terms of calculating those write-downs and in terms of our listed funds I'll talk about in a second, we've written those values down to 30 September levels 2008. The actual gross charge is approximately AUD1.2 billion, approximately AUD1.2 billion with an NPAT impact of approximately AUD400 million. Now I'll go through that in a second.
As I mentioned before, although we've written down a number of these co-investment assets reflecting the listed share prices, the underlying assets continue to perform in line with expectation. Now our policy that Macquarie has of investing alongside its shareholders has been a key part of our alignment with investors to date and will continue to be a key part of our alignment with our investors going forward, so we've seen no change to that policy going forward.
Now this is a chart dealing with the write-downs that we have been dealing with. Now at the top you'll see a one-off cost in terms of exiting Italy. Obviously as a result of the change in market conditions, our mortgage business in Italy that we had been hopeful about in prior years, was effectively not profitable on a long-term viewpoint so we've decided to exit that business incurring a cost of AUD226 million, as you can see here, as well as that we've had loan losses in the business, loan losses in real estate and loan losses across a whole range of other businesses within Macquarie. These are impairments and provisions that we've taken. A lot of these, of course, are unrealised but it's us actually recognizing that the loan may not be repaid in full.
And the other category we have here is basically mark-to-market of a range of trading positions that we have. Now this category, the largest category almost AUD700 million, is where we have invested alongside clients in funds management or co-investment opportunities. Now the amount is substantial and the important point that I'd like to make here is, as I mentioned before, generally speaking these assets are continuing to perform in line with expectation and the write-down that we've taken is to reflect the listed market prices.
Now what's the methodology we've used? Well, importantly when we talk about these funds, these funds are not trading stock. We don't normally mark them to market, so we only write them down where there has been some sort of impairment in the underlying value. Now the accounting standards provide us with a guide as to what impairment looks like and basically requires us to look at the market, look for significant changes in market, economic, all the legal environment, the market economic or legal environment.
How do we applied this to our investments? Well, basically where there's a listed investment we've looked at that price. Unless there's really strong underlying evidence of the how the assets are actually trading outside the listed market, with the unlisted investments we can't look at a direct listed comparable but we do have a look at the underlying performance of the asset and then we do look at some comparables out there that may look like the unlisted investment. As a consequence of that you'll see one of the-- in two of the funds that we haven't included on the list is our investment in [MAP] and [MIG].
Why haven't we included our investments in MAP and MIG in terms of the write off? That's dealt with on this slide here and basically the answer is there is strong evidence of the underlying value of these assets, strong evidence and, as you can see, we have very recent evidence in terms of the value of these assets. If you look at MIG-- sorry, if you look at MAP, our see through valuation of MAP will be based on an EBITDA multiple of something like 12.3, 12.3 that's EBITDA to enterprise value. These are some of the comparables that have happened in the last month or so and you'll see here numbers of 28, 25 and 19 and 24, plainly substantially in excess of the book value that we have Macquarie Airports in, so it would be frankly impossible for us to be looking at writing that down.
Certainly with MIG, the IRR on the assets is about 12% we carry. On a see through basis we put the Lusoponte sale that took place recently at 9.2 and then we had the Penn Turnpike sale that took place generously somewhere between 10 and 11%, so for both MIG and MAP we are at the moment very confident in terms of market comparables, what the underlying value of these assets are.
More broadly, in terms of our funds business in terms of the assets, the assets continue to perform well. As I mentioned, these are tangible assets. These are mostly very vital assets in terms of communities they operate in and these assets continue to perform well, so here are our 10 largest assets and this chart here charts its 3-year EBITDA growth, 2-year EBITDA growth and 1-year EBITDA growth and you'll see across the board those 10 assets are performing well and continuing to grow in the current circumstances.
Just going back there again, the key issue though today is one of leverage. The question people are asking, that is leverage, earning 4% of our total portfolio that's earning 4% of the debt on this total portfolio of asset comes up for renewal within the next 12 months and the evidence coming through from the market in this (inaudible) in the world is indicating that these infrastructure assets are continuing to be refinanced across the globe.
In terms of another way of looking at the leverage situation we've provided this chart with a lot of numbers and it's just a rough guide but it's trying to say what would the world look like and what would these assets look like in...
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