Macquarie Group raided its profitable Macquarie Airports piggy bank to dress up its 2010 interim result and hold the reported fall in after-tax profit to a more comfortable level.

All the reports of Macquarie Group’s 16% drop in interim after tax profit, reported on Friday concentrated on a host of factors, from higher staffing costs, to lower income, to better-than-expected returns from car leasing and the bank’s taxpayer supported expansion in funds management businesses in North America.

But the reports missed or glossed over one very important factor detailed in the two of the various filings from Macquarie on Friday, the upshot of which was the difference between the smallish fall reported, and a very nasty plunge in interim earnings, on an after-tax and pre-tax basis.

The filings reveal that it was another visit to the well of its biggest and best infrastructure play, Macquarie Airports, for what could be one last, very handy, pre-tax earnings boost of up to $180 million via a well- timed reclassification of that 23% holding and an equally well-timed distribution by MAp in September.

The first transaction is detailed in the so-called 4D filing that reveals that operating income included “a gain on reclassification of retained investments of $114 million, which predominantly relates to the reclassification of an investment in MAp from an associate to available for sale due to loss of significant influence. On reclassification the retained stake was required to be re-measured to fair value;” (Oddly, the $114 million contribution from the reclassification of the MAp holding was not spelt out in the more detailed filing entitled Management Discussion and Analysis).

In other words, Macquarie took in a gain from its 23.2% stake in MAp now being “available for sale”. So it revalued the holding. MAp’s securities were priced at $2.92 at the end of September, a marginal rise from the $2.81 at the end of September, 2009. But that’s indicative only. The MAp securities would been in the Macquarie books at less than the 2009 value. The 11c a security rise over the year produces an increase of about $45 million in the holding of just over 431 million securities.

That revaluation was on paper, not actual cash in hand, unlike the 2009-10 experience where Macquarie (if we remember) sold its management rights for a very handy $345 million net gain, according to the 2010 full year result.

That was very handy in boosting the 2010 full year profit to $1.093 billion from the $974 million in 2008-09.

MAp securities traded at $3.05 at the close on Friday, so there’s another small gain this half if that level can be sustained. If not, Macquarie might have to reverse some of the gains it took into its accounts.

But wait, there’s more, another $66 million from a well-timed distribution by MAp, according to page 14  of the Management Discussion document.

“The dividends/distributions received/receivable on investment securities available for sale was $A66 million, compared to $A21 million in the prior corresponding period, largely attributable to the MAp Group special distribution in September 2010. That distribution was made last month.”

So about a pre-tax injection of $180 million all up, predominantly from MAp, appeared in Macquarie income stream in the September 30 year, providing a timely boost and making the eventual fall look not so dramatic

Without this extra income, total net income would have been $3.48 billion instead of $3.66 billion reported and pre-tax profit would have been $316 million instead of $496 million, a fall from 2009’s pre-tax figure of $532 million of 45%, instead of the 25.5% drop reported in the accounts.

The fall in after-tax profit could have been as high as 41%, to $283 million, instead of the reported 16% to $403 million, from the $479 million earned in the September, 2009 half year. The size of the after tax contribution depended on the tax treatment for the two transactions involving MAp.

The use of the MAp holding to provide a timely boost to the interim result helped Macquarie Group shares rise 4.7% after the profit was revealed on the basis that it wasn’t as bad as expected.

All in all another triumph from the Millionaire’s Factory.

Peter Fray

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