Goodman Group Powers On

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Goodman Group’s March quarter update included increased guidance on the back of data centre demand.

-Goodman Group upgrades FY24 earnings guidance (as expected)
-Data centre demand driving performance
-Brokers see upside risk to guidance, still
-Buy ratings dominate

By Greg Peel

REIT and property fund manager Goodman Group ((GMG)) is among only a handful of ASX-listed companies that have a direct connection to the AI boom, being a developer and manager of data centres.

Goodman shares suffered along with the whole real estate sector in 2022 as RBA rate rises stung, but the stock has since returned to a steady upward path, accelerating in 2024. The stock is up 56% in six months and 28% in the March quarter.

Driving the company has been a shift in focus towards data centres to accommodate increasing demand for AI and cloud applications, as its traditional business of building distribution and other warehouses declines. Distribution centre demand was an online retail story, which was boosted during covid but is now seeing a drop-off in demand.

Not to worry, data centre demand growth more than offsets.

Data centres now comprise 40% of Goodman’s work in progress. Goodman’s “power bank” of data centre capacity increased to 4.3GW in the March quarter from 4.0GW. Of that, 3.0GW is split between Europe and Japan.

By contrast, notes Morgans, pure-play data centre company NextDC ((NXT)) has a total planned capacity of 1.0GW, which the broker estimates will take seven years to fill.

Guidance

At its update, Goodman upgraded FY24 operating earnings growth guidance to 13% from 11%, having upgraded with its at its first half result release to 11% from 9%.

The upgrade is actually below consensus forecast of 13.6%, but as Macquarie notes, Goodman has upgraded guidance at its March quarter update each of the past three years, and beaten guidance at the full-year result in each of the last six years.

This week's upgrade was largely driven by higher-than-expected performance fees and stronger management income, and FY24 performance fees are expected to be materially higher than the $150m previously flagged. Macquarie has an earnings growth forecast of 14% and a performance fee expectation of $250m.

Based on the operational comments, Jarden remains comfortable there is further upside risk to Goodman's new guidance. More importantly, this broker suggests, as we move towards the FY24 results, the focus should shift to FY25, for which Jarden’s growth forecast of 10.7% and consensus of 12.3% could prove conservative.

Upgraded guidance now matches Morgan Stanley’s estimate.

Although the stock has performed well year to date, Citi too sees further potential for Goodman to beat its renewed guidance at year-end results, with continued strong guidance into FY25.

Soft Commencements

March quarter commencements of $0.7bn was relatively soft, Macquarie suggests, although management acknowledged the size of data centre projects — some in excess of $1bn — was likely to lead to continued quarter-on-quarter volatility in completions and commencements.

Macquarie believes given the higher expected returns from data centre projects (the broker previously estimated development margins of of 60% or more), a reduction in the production rate and any quarter-on-quarter volatility in commencements is unlikely to affect the growth prospect for development earnings, as timing of payments/profits will occur throughout production.

Morgans cites anecdotal comments suggesting data centre development margins are double that of traditional warehouse development, albeit predicated on access to power and planning approvals.

Valuation

In 2024 to date, Goodman Group has re-rated from a forward PE of 23x to 29x. Macquarie’s target price implies an FY25 multiple of 30x, which compares to the average forward multiple of 38x for Goodman’s comparable peer group, which has a similar earnings growth trajectory to Goodman.

Macquarie remains attracted to Goodman's ability to deliver low double-digit earnings growth into the medium term, with line-of-sight continuing to improve, underpinned by the data centre opportunity. Hence, an Outperform rating.

Jarden sees Goodman as remaining the best quality stock in the sector with growth well ahead of REIT peers, which should underpin the share price, but this broker would not be surprised to see some profit-taking in the near term given the premium valuation versus other REIT fund managers.

The key downside risk Jarden sees is a switch back to cyclical REITs, with Goodman a potential funding source (ie, buying in traditional REITs ahead of RBA rate cuts this year or next by trimming of gains achieved in Goodman).

In addition, any evidence of a slowdown in development activity would put pressure on earnings across all divisions, the broker notes.

Jarden has an Overweight rating, as does Morgan Stanley.

Citi has a Buy rating.

Morgans views Goodman as a high-quality, founder-led business with a robust balance sheet and a portfolio of A-grade data centre and industrial assets. But despite these positive characteristics, this broker has a Hold recommendation on valuation grounds.

Valuation was also an issue for UBS back at the first half result release, at which earnings growth guidance was upgraded to 11% from 9%. This led to a downgrade to Neutral.

At the same time, Ord Minnett suggested the market was appearing more optimistic about industrial property and the opportunity in data centres compared with its own assessment, and maintained a Sell rating.

Neither broker has as yet updated for the March quarter.

Among those who have, Jarden has a target price of $30.50 (and an Overweight rating despite the share price currently being closer to $34).

Similarly, Citi (Buy) has a target of $32.50.

Morgans (Hold) has set $33.50 after an increase from $29.00 post the March quarter update.

Morgan Stanley (Overweight) has raised its target to $36.65 from $35.30.

Macquarie (Outperform) tops the list with an increase to $36.37 from $34.84.

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