Company Reports

Goodman Group posted a strong half-year result, with operating earnings per security of AUD 0.59, 28% higher than the first half of 2023. Management now signals fiscal 2024 OEPS growth of 11%, up from the 9% guidance provided in August 2023. We increase our OEPS estimate to AUD 1.05, up from AUD 1.03, mainly driven by increased assumptions for rental growth this year. We also increase our medium-term rent assumptions, given Goodman’s current rents are an estimated 25% below market rents. This, combined with the time value of money, pushes our fair value estimate up 7.0% to AUD 20.75 per security. Even so, Goodman Group securities look overvalued, with the market seemingly more optimistic than we are about industrial property and Goodman’s fast-growing opportunity in data centers.

Goodman Group is one of the world’s premier developers and managers of industrial property projects and investments. The group was co-founded in Australia by Gregory Goodman who remains CEO, and now has projects and customers in Asia, Europe, and the Americas.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

Goodman Group is one of the world’s premier developers and managers of industrial property projects and investments. The group was co-founded in Australia by Gregory Goodman who remains CEO today, and now has projects and customers in Asia, Europe and the Americas. A typical project involves obtaining a development site, signing tenants onto a lease, and investors to pay for the development and acquire the completed project. Goodman typically retains a minority stake and continues to manage sites after completion, collecting development fees, leasing fees, management and performance fees, and its share of rent.

We increase our fair value estimate for narrow-moat Goodman Group by 5% to AUD 14.80, after a stronger-than-expected first-half result. Goodman increased guidance for operating earnings to AUD 64.4 cents per security, and we increase our estimate 3% to AUD 64.7 cps. We make no change to our distribution estimate of AUD 0.30 per security, which is in line with management’s latest guidance.

Goodman Group is one of the world’s premier developers and managers of industrial property projects and investments. The group was co-founded in Australia by Gregory Goodman who remains CEO today, and now has projects and customers in Asia, Europe and the Americas. A typical project involves obtaining a development site, signing tenants onto a lease, and investors to pay for the development and acquire the completed project. Goodman typically retains a minority stake and continues to manage sites after completion, collecting development fees, leasing fees, management and performance fees, and its share of rent.

Narrow-moat-rated Goodman Group delivered a strong first-half result, with operating earnings per security of AUD 28.8 cents. The momentum of the business, particularly its funds management division, prompted an increase in profit guidance for the full year. Management now expects 2020 earnings to be 11% above 2019, up from the previous 9% growth expectation.

The phenomenal demand for logistics assets was on display with today’s first-quarter operational update from narrow-moat-rated Goodman Group. The release revealed remarkably strong growth in funds under management, or FUM, to AUD 48.2 billion in the first quarter of fiscal 2020. We upgrade our estimates for the group’s FUM, now expecting a 2020 year-end asset book of slightly more than AUD 50 billion.

Goodman Group delivered a strong result that was above our expectations. We slightly increase our fair value estimate to AUD 12.30 from AUD 12.00, though the security still screens as overvalued.

We confirm our AUD 12 per share fair value estimate for Goodman Group as we transition coverage to a new analyst. Our narrow moat, medium fair value uncertainty, and Standard stewardship ratings are unchanged. At current prices, the stock is trading 15% above our intrinsic valuation. Our fair value estimate implies fiscal 2019 price/earnings of 24 and enterprise value/adjusted EBITDA of 22. Our valuation is derived using a discounted cash flow methodology, using a 9% cost of equity and a weighted average cost of capital of 8.0%. Goodman’s narrow economic moat is sourced from switching costs and efficient scale benefits.

After raising fiscal 2019 earnings guidance to growth of 9.5% from 7% in February, we weren’t expecting any further upgrades as part of the third-quarter update. That said, narrow-moat-rated Goodman provided a mini-upgrade, advising assets under management, or AUM, will exceed AUD 45 billion by June 2019, up by at least AUD 2.1 billion or 4.9% since December 2018 when AUM was AUD 42.9 billion. Part of the uplift will be due to movement of development assets to completed assets, with the balance attributable to further asset value appreciation driven by rent growth and potentially a further reduction in market yields.

In what has now become a recurring theme of underpromising and overdelivering, Goodman Group has upgraded fiscal 2019 earnings guidance to growth of 9.5% from 7% previously. The raised guidance is mostly due to a step up in performance fees as the returns for wholesale investors in Goodman managed funds were materially above benchmark, a major catalyst being ultra-loose monetary policies and falling bond yields. After years of tight reins on its development business, Goodman has said the high demand supports a more aggressive stance and development work in progress will exceed AUD 4.0 billion after hovering around AUD 3.5 billion in recent years. The faster rate of development will have a multiplier effect on earnings, increasing development fees, but also accelerating the growth rate in external funds under management, the firm’s highest return on equity activity.

The first-quarter fiscal 2019 operational update from Goodman Group contained no material new financial information, with guided growth in fiscal 2019 earnings and distributions reaffirmed at 7%. Our fair value estimate remains at AUD 10.20 and narrow-moat-rated Goodman screens as fairly valued at current levels.

Goodman Group's fiscal 2018 operating earnings rose 8% to AUD 46.7 cents per security, or cps, marginally above guidance and our forecast. Compositionally, this was a strong result, with Goodman beating our expectations for growth in assets under management, or AUM, and margins on development completions. Upgrades to our forecasts for management fees, development margins and rents, results in a 6% and 12% upgrade, respectively, to our fiscal 2020 and 2021 EBIT forecasts. Our fair value estimate for narrow-moat-rated Goodman increases 14% to AUD 10.20. Goodman screens as fairly valued, currently trading at AUD 10.60. Guided fiscal 2019 earnings (adjusted for forthcoming dilution of staff options) is AUD 50.0 cps, implying growth of 7% and a forward P/E of 21.

Industrial property has been the standout performer among the major property classes over the past couple of years. A major reason is the weight of money following the evolution in the retail sector. Wholesale investors are seeing industrial as a good way to benefit from the shift in consumer spending from brick-and-mortar stores to online shopping. Industrial property values have been boosted by raised rental growth expectations as e-commerce tenants are willing to pay premium rents to operate from sites that deliver strategic supply chain benefits. Values have also benefited from the search for yield.

We’ve upgraded our expectations for the value of logistics facilities Goodman Group develops annually. We’ve also raised the proportion of completed product that is retained by the approximately 10 funds managed by Goodman to 85% from 75%-80%, positively impacting the growth rate in funds under management and associated fee income. We’d previously been forecasting an outer-year economic slowdown triggering a temporary retracement in annual development volumes, with a 10-year annual average for work completed of AUD 3.4 billion. Removing this retracement increases the average annual work completed to AUD 3.9 billion. Following these changes, our fair value estimate increases to AUD 8.90 from AUD 8.30, with narrow moat-rated Goodman screening as undervalued, currently trading around AUD 8.50.

Goodman reported a better-than-expected first-half fiscal 2018 profit of AUD 23.3 cents per security, or cps, and upgraded fiscal 2018 earnings and distribution outlook to 8% growth from 6% previously. We see Goodman as making well calculated decisions on its allocation of capital and how it operates with its key investment partners. The strategy to increase the percentage of development in the Goodman funds has numerous positives. First, the capital the firm has allocated to riskier activities is reduced, permitting deleveraging and boosting return on equity. Second, the strategy promotes stronger alignment between Goodman and its major investment partners, which bodes well for longer-term inflows and a stable base of assets under management.

Goodman Group’s operational update for the September quarter revealed the business continues to benefit from very supportive market conditions. Fiscal 2018 guidance was reiterated for 6% growth in operating earnings to AUD 45.7 cents per security. Our earnings forecast and AUD 8.20 fair value estimate are both unchanged for the narrow moat-rated firm. We continue to like Goodman’s strategy and growth prospects, but see this as fully reflected in the current share price.

Site visits to a series of Goodman Group assets in Hong Kong and Shanghai have highlighted to us how strategically important industrial facilities can be to operators in competitive industries. The rotation of the portfolio up the quality curve by annually selling the circa 5% of assets with the weakest rental outlook is behind the small upgrade to our medium-term rent growth expectations. Increased visibility on the large and high-value facilities being developed in Asia and the establishment of a new Brazilian fund are behind our raised our outlook for development work in progress to rise to AUD 3.9 billion in fiscal 2020. The revisions increase our fair value estimate to AUD 8.20 from AUD 8.00, with narrow-moat-rated Goodman fairly valued at current levels.

Goodman Group’s fiscal 2017 earnings of AUD 43.1 cents per security, or cps, were 1% ahead of forecast mainly due to stronger-than-expected earnings in the funds management division. Our fair value estimate increases slightly to AUD 8.00 from AUD 7.90 due to modestly raised expectations for rental growth and funds management earnings. An offsetting factor is a very generous executive share plan, which totaled AUD 85 million in fiscal 2017. With Goodman currently trading around AUD 8.50, the stock screens as overvalued, with the guided distribution of AUD 27.5 cps, representing a yield of 3.3% based on a 60% payout ratio.