Third Quarter Update Highlights Value In Goodman Group

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This story features GOODMAN GROUP.
For more info SHARE ANALYSIS: GMG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

If a stock offered more than 25% upside to the average of broker price targets according to the FNArena database and was forecast to pay a yield of better than 8% both this year and next, would you be interested? More to the point, if the stock was a property play and thus exposed to higher interest rates and development margin pressure would you still be interested?

The stock is question is Goodman Group ((GMG)), which currently enjoys a sentiment indicator reading of 0.5 on the FNArena database as five of the eight brokers to cover the stock rate it as a Buy, compared to two holds and a single Sell rating.

Credit Suisse says no you shouldn’t be interested, rating the company a Sell based on the view a combination of falling valuations and weak offshore currencies will keep a lid on development and management earnings through 2009, which will limit the rate at which distributions can be increased.

On the broker’s numbers it sees distributions as increasing by only 1% next year as development margins in particular come under pressure, though the good news for investors is the broker expects an improvement in this regard from 2010.

As well the broker acknowledges there could be additional good news from some upside risk to its earnings forecast for 2009, which currently stands at 33.2c, though the broker suggests that if the company did better than forecasts it would only be by sourcing earnings from more volatile sources.

Add in the fact the stock is currently at a premium to its global peers and at a premium to Australian alternative Westfield Group ((WDC)) of about 7%, and on the broker’s numbers it sees little hurry to get set, pointing out the stock price moves around enough that there are chances to take a position at more favourable valuation comparisons for those willing to wait.

But waiting is not necessary according to Merrill Lynch, who came away from management’s 3Q update quite impressed thanks to solid leasing results, a limit to the incentives the group had to pay out and the fact earnings and distribution guidance was reiterated, all of which it suggests was better than the market had been expecting.

While cap rates and asset values remain a concern given the pressure on property prices in several markets, the broker continues to see growth in the group’s development business, particularly as a majority of projects return less vulnerable development fees rather than development gains, which limits the risk of any nasty surprises. 

JP Morgan is also positive on the development side of the operation as it notes the company continues to take market share from smaller developers that are more exposed to the current tight credit market. While noting the group needs to continually recycle capital the broker sees it as well placed to do so, not least because its $2.5 billion in undrawn capital capacity can be absorbed by $2.6 billion in development completions forecast for next year.

Asset sales and proceeds from warehoused assets will also contribute to asset recycling in the broker’s view, with the latter in particular to assist in the launch of a number of new funds over the next 18 months in markets including Japan, China and the UK. On the broker’s numbers the group should deliver earnings per share of 34.5c in FY09, an estimate solidly above Credit Suisse’s number.

Rather than trading at a premium JP Morgan estimates the stock is currently at a solid discount to the analysts’ valuation of $4.60, this despite the yield and growth outlook being superior to many of its peers. As a result the stock is the broker’s preferred exposure among large capitalisation Australian property trusts.

Macquarie’s Outperform rating follows similar reasoning, the broker pointing out while group growth is slowing the returns on offer remain attractive compared to others in the sector, even allowing for slight reductions to the analysts’ earnings estimates post the 3Q update.

The changes have not been significant as the broker’s target price has only fallen to $4.60 from $4.80 as a result, while JP Morgan’s target price is solidly above $5.00 and others in the market have targets in excess of $6.00. Overall the FNArena database shows an average price target of $5.07, while Thomson One Analytics shows a median share price target of $4.64.

Shares in Goodman Group today are higher and as at 2.05pm the stock was up 8c at $4.06, which compares to a trading range over the past 12 months of $3.52 to $7.15.

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