Australia | Nov 03 2021
This story features GOODMAN GROUP. For more info SHARE ANALYSIS: GMG
Goodman Group has already upgraded the earnings outlook for FY22, thriving on the demand for logistics space created by the pandemic and stepping up the acquisition of industrial assets
-Rental growth driven by retailer demand for logistics in the wake of the pandemic
-Brokers confident growth of 10% or more per annum can be achieved over the next few years
-Goodman Group able to evaluate returns potential versus low initial yields
By Eva Brocklehurst
Goodman Group ((GMG)) is a hive of activity, across developments and asset management. Guidance has been upgraded to growth in earnings of more than 15%, ahead of expectations and despite delaying the recognition of $200m in development profits.
Credit Suisse believed it was always a matter of time until an upgrade occurred, given the conservatism embedded in prior guidance. Hence, with buoyant development margins, asset values and rents, the actual FY22 result could yield further surprises to the upside.
Morgan Stanley was actually surprised the upgrade occurred so soon after the FY21 results, which suggests the business is around 12 months ahead of the market in terms of its asset management trajectory.
Rental growth has been strong, driven by retailer demand for logistics driving up the value of these assets. There is the added benefit of enviable locations, the broker ascertains, resulting in rental growth that is more than around 2x reported income growth.
The company has found major retailers in the US have been overwhelmed during the pandemic from what can be achieved from stores in terms of online fulfillment. Those retailers have stepped up their commitments to logistics facilities. This has had a flow-on effect globally.
The $200m unrecognised profit that is available for FY22 provides Morgan Stanley with increased confidence the company has the means to ensure earnings growth can be maintained at least through to FY25.
Work in progress of $12.7bn is materially ahead of prior guidance, stemming from $3bn in commencements that were offset by $1.6bn in completions. Commencements have been spearheaded by the US and Japan.
Work is heavily weighted to Asia, followed by the Americas, then Australasia, and finally the UK/Europe. The company continues to rebuild its land bank with brownfield infill sites representing around 60% of the global book.
Macquarie is confident the current production rate can be sustained as the time to develop has expanded to 22 months from 19 months at the FY21 results. This means greater visibility on the workload and development profits.
In turn this will benefit funds under management, which have been upgraded to $70bn for FY22. With further profits to be recognised beyond FY23, Macquarie has increased confidence in the ability of the business to achieve growth of more than 10% per annum over the medium term.
Given the momentum, Jarden believes Goodman Group can easily ramp up its development pipeline, but if work stabilises and asset revaluations stop occurring, it will be hard to maintain the current growth rate.
Multi-storey developments are an increasing part of the development work and, despite increasing material/construction costs, rental growth and pre-purchasing have been sufficient offsets. The strategy to focus on regeneration projects will be maintained.
The company has indicated net property investment income growth is stable, but could trend higher in the short to medium term because of the scarcity of product and high tenant demand.
Goodman Group is increasingly acquiring assets. Over the past five years acquisitions and divestments have generally offset each other, UBS notes, but during the current half-year the company has guided to $2bn in acquisitions.
Moreover, Goodman Group has emphasised the benefits of strong tenant relationships and an understanding of longer-term requirements, amounting to an ability to evaluate the returns potential versus low initial yields.
One recent example, UBS cites, is the Mowlem Trading Estate (UK) which was acquired on a reversionary yield of around 3%, yet it will not be developed into a multi storey complex for five or more years.
The broker also assesses partnerships should provide returns exceeding 20% in FY22 with substantial accrued performance fees. Partnership returns per annum have averaged 16% over the past four years.
Morgan Stanley calculates Goodman Group could become a "$80bn empire" by June 2023, implying 15-20% compound growth in assets under management over two years.
The main downside risk Macquarie envisages is higher bond yields and a significant increase in risk-free rates could have implications for asset valuations, in turn impacting funds management fees. A moderation in tenant demand could also have negative implications, although this appears unlikely at this stage.
Jarden expects the market will assume 15% growth is the new normal and in the medium term this would require work and development margins to keep growing, with any slowdown in asset revaluations to be offset by growth elsewhere.
While the business is in a strong position, Jarden is concerned market expectations could move too far ahead after this update. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, retains an Underweight rating and $22.90 target.
Ord Minnett considers the risk to the upside, believing Goodman Group has a material build up of development performance fee profits being held for future years. Significant growth in development earnings as projects are delivered should ensure confidence is maintained in the earnings outlook over a number of years.
Credit Suisse asserts the stock screens well on an earnings multiple basis. While not cheaply priced, the shares will continue to outperform because the company taps an attractive growth outlook, strong balance sheet and continued demand for well located quality industrial assets.
The database has five Buy ratings and one Hold (UBS). The consensus target is $25.29, suggesting 5.6% upside to the last share price, irrespective of the strong performance to date.
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