We researched Goodman Group (ASX:GMG) in The Dynamic Investor earlier this month. At the time, the shares had weakened following the release of full-year results. We took the view that the weakness presented an attractive entry point given GMG’s track record of execution and consistent delivery of above-consensus earnings. The shares have since recovered strongly and are trading closer to market valuations (currently ~$36 per share).
With this is mind, we assess whether current levels still present an entry opportunity.
About Goodman Group
Goodman Group is an integrated property group, with operations throughout Australia, NZ, Asia, Europe, UK, US and Brazil. The Company is one of the largest specialist fund managers of industrial property globally and derives revenue from four sources: Property rent, developments, investments and funds management.
The Development division sources land and uses 3rd party builders to construct high-quality industrial assets and business parks. This undertaken, predominantly for 3rd party logistics providers and large retailers (both online and traditional). This division has become the main driver of group earnings in recent years, growing its contribution to total earnings from 35% in FY19 to 49% in FY24.
Key Fundamental Drivers
Guidance Typically Conservative
One market concern emerging out of the recent results release is that the Company provided FY25 guidance for EPS growth of +9%. This was below consensus estimates for +12% growth. It is worth noting that the Company is typically conservative in setting full-year guidance at the start of the year. GMG also has a track record of upgrading guidance throughout the year, as well as beating its guidance at the full-year result.
The factors underpinning the potential for EPS upgrades include: i) Earnings recognition of data centres with options including turnkey vs powered shell, ii) Land sales, iii) Bringing in partners for data centres early, or deciding to fund/progress projects further to enhance profit margins.
Data Centres the Next Growth Opportunity for Development Division
Data centres represent the next significant growth leg for GMG, as a provider of essential digital and logistic infrastructure. They account for 40% of current Development Work In Progress (WIP). This portion is expected to rise rapidly to >50%. It will also likely see WIP increase further as these longer-duration, higher-value developments are undertaken.
Combined with global demand for and pricing of AI, GMG’s powerbank should underpin long-term earnings growth. Land scarcity, complex planning, regulatory hurdles and the challenges of securing power represent significant barriers to entry and as a result supply is struggling to keep up with demand. GMG’s competitive advantage is that it has the sites, the power, the capability, people, track record, and commitment to build the infrastructure, accelerating time-to-market.
These factors translate into increased development production rates and margins over the longer term. However, there is variability over the shorter term depending on the types of data centres commenced and specific project commencements.
Rental Income Expected to Remain Strong
Like-for-Like Net Operating Income (NOI) growth slowed slightly to +4.9% (from 5.0% in 1H24). However, while market rental growth has slowed in most regions, the average expected rent reversion to market remains at ~24%. This highlights latent under renting across portfolio.
Accordingly, LFL NOI growth is expected to remain elevated in the medium term given the location of GMG assets in low vacancy cities and existing under-renting of the portfolio of ~24%. The embedded rent reversion is expected to support similar like-for- like NPI growth at current levels, on average, over time. A key factors supporting the potential reversion to market rent is that industrial vacancy levels in most global markets remain near record lows. Also, supply continues to be unable to meet demand.
Gearing & Liquidity Position Continues to Improve
Balance sheet gearing (8.4%) is towards the bottom of the group’s target range of 0-25%. GMG aims to remain in the lower half of its target range given development activity and impact on long-term capital needs. GMG has ~$4b of liquidity, up significantly over the last year to the highest level in 10 years. Further, the liquidity position is likely to expand given that GMG is likely to continue holding dividends constant over FY25 & FY26.
Fundamental View
Notwithstanding the gain in the share price since our report, GMG’s outstanding fundamentals and long-term upside make it an essential core holding. The question is: what is the appropriate entry point?
Charting View
GMG peaked in July and then it consolidated near support at $32. GMG made a double bottom (arrows) before breaking higher again several days ago. The stock is now on the way to trending higher and it still remains a buying opportunity.
Michael Gable is managing director of Fairmont Equities.
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