Afterpay Surges on Merger | Macquarie Update

4 August 2021

Global markets were mixed overnight, with the US market (S&P 500 index -0.2%) down on softer than expected US manufacturing growth data & on-going supply constraints. At the same time, China/US tech uncertainty concerns eased as the China regulator called for more cooperation. US ISM manufacturing index fell for a second month (keep in mind it is still at historically high levels) – suggesting growth may have peaked due to production constraints, shortages of raw materials, and difficulty in finding labour.

Shares of travel stocks that could be hit by COVID variant related restrictions were weaker as well as materials, industrials and energy stocks being the biggest laggards. Square shares jumped +12.7% after announcing its plans to buy Afterpay. Pfizer climbed +2.8% after news stating that FDA could fully approve its covid-19 vaccine in coming months. On Semiconductor released a solid quarterly result and gave guidance which beat expectations causing the stock to climb up +14%.

European stocks was higher overnight, with the Stoxx 600 index up +0.6% higher on strong earnings outcomes – Retail stocks led gains.

Macquarie (MQG:ASX)

Macquarie was a touch higher following last week's AGM highlighting that its 2022 first quarter was ‘significantly up’ on the same corresponding period last year, and lowered its dividend pay-out rate. 

MQG’s short- and medium-term growth prospects look bright with ongoing capital deployment across the divisions. Interestingly, MQG has announced the acquisition of AMP’s Global Equity and Fixed Income (GEFI) business for up to $185m. The acquisition looks strategically sensible, adding another $60bn to Macquarie’s Assets Under Management ($720bn). While AMP’s flows have been under pressure in recent years, this is reflected in both an undemanding acquisition multiple. The transaction is relatively immaterial in the scheme of the group's overall earnings.

While MQG is a quality business, we feel that the Big 4 Aussie Banks (namely ANZ & Westpac) are more attractively priced at the current juncture. Further, given the strength of the property market on both side of the Tasman, we are comfortable taking a more concentrated bet on the mortgage market. As a result, we remain HOLD rated on MQG, preferring other banking sector peers as BUYS.

Australia & New Zealand Market Movers

The Australian market jumped yesterday (ASX 200 index +1.3%) breaking into a fresh record high, with all sectors recording gains.

Afterpay led the gains surging +18.8% after receiving a $39 billion takeover offer ($126.61 per share) from Square, bolstering the rest of the tech sector, particularly other buy now pay later stocks.

Bank stocks were generally stronger while materials reported the smallest gain following a sharp fall in iron ore prices causing mixed results across the sector.

The New Zealand market was higher on Tuesday (NZX 50 index +0.9%) as investors jumped back on growth stocks reversing Friday's losses. Mainfreight led the market up +3.5%, followed by Summerset (+3.1%), A2 Milk (+2.7%) and Fisher and Paykel Healthcare (+2.7%).

Genesis Energy shares was down -1.6% yesterday after announcing it lost its arbitration process with Beach Energy in respect to a dispute relating to carbon liability amounting to ~$53m for 2018 through to 2021 – which Genesis would be liable for. On a more positive note Genesis energy announced its next “Future-Gen” project that aims to replace 2,650GWh of thermal generation with renewable energy generation by 2030. While an unfortunate outcome, GNE is the gentailer which offers the most attractive dividend of ~5.2% amongst its peers. The GNE sell-off caused investors to switch to the more 'greener' gentailers Contact Energy (+2.3%) and Mercury (+ 2.6%). 

3 Things Markets will be Watching this Week

  1. Key events this week include US Earnings season scheduled to provide quarterly updates including Alibaba, Nio, Nikola, Geneal Motors, Kraft Heinz, Booking Holdings, Uber, Square and Dropbox
  2. Employment data (Nonfarm payrolls) and ISM manufacturing survey data in the US.
  3. Locally, the RBA cash rate call is the key event along with the latest employment data in NZ. Earnings season kicks into gear with Resmed, REA Group and News Corp all scheduled to report.
Global markets were mixed overnight, with the US market (S&P 500 index -0.2%) down on softer than expected US manufacturing growth data & on-going supply constraints.

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