More upside for Goodman Group shares

After a challenging 12-month period, Goodman Group (ASX:GMG) shares rose sharply following the release of financial results for the 12 months to 30 June 2023 (FY23). We recently researched the Company in The Dynamic Investor to assess whether the shares had re-rated to fair value, or whether there was scope for another re-rating.

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. Revenue is generated 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. These assets are used predominantly for 3rd party logistics providers and large retailers (both online and traditional). The Development division has become the main driver of group earnings in recent years, growing its contribution to total earnings from 35% in FY19 to 56% on FY23. Previously, earnings from the Management division accounted for most group earnings in FY20 (38%). This portion has declined to 21% as at FY23.

Key Fundamental Drivers

Forward Guidance Appears Conservative

For FY23, GMG reported operating Earnings Per Share (EPS) of 94.3c, which represented 16% growth on FY22 and was ahead of company guidance for +15% growth. FY23 was the 6th consecutive year of GMG beating guidance at the full-year result.

At the FY23 results release the Company provided initial EPS guidance of 102.9c, up 9% on FY23. The initial guidance for FY24 appears conservative considering:

• The Company’s track record in progressively upgrading guidance throughout the financial year. Guidance is usually upgraded at the interim result.

• There are several factors underpinning the potential for EPS upgrades. These include shifting more developments on balance sheet and margin accretion in the Development division.

Growth Opportunities from Development Division

Despite a flat outlook for Work in Progress (WIP), ongoing growth in development earnings are expected to be driven by three key factors:

i. Less time taken to complete projects.
ii. GMG is taking on a greater proportion of the development across the platform on its own balance sheet, rather than in the funds. This transition has the potential to be incremental to earnings.
iii. There is a significant opportunity to improve development returns via its exposure to data centre projects. These presently comprise approximately 30% of WIP and are higher margin.

Rental Income Expected to Remain Strong

GMG reported Like-for-Like Net Operating Income (NOI) of +4.7% in FY23, up from +3.9% in FY22, with NOI momentum expected given an improvement in 4Q23. The increase in property income was driven by underlying growth in rents, development completions and increased Partnership investments; which are offsetting sales and assets withdrawn for redevelopment.

There is upside to already elevated NOI levels in FY24 from the reversion of passing rents to market rents. (Passing rents are rents paid at any point in time) The upside to market rents has sharply improved over the last 12 months, indicating that market rents continue to grow. Across the regions, the potential reversion to market rent include: North America +66%, Australia and NZ +37%, Continental Europe and UK +17% and Asia +1%.

Low Gearing & Adequate Liquidity

Balance sheet gearing (on a debt to total assets basis) as at 30 June 2023 was 8.3% and remains towards the bottom of the group’s target range of 0-25%. Consistent with previous guidance, GMG will aim to remain in the lower half of its target range.

Further, GMG continue to maintain high levels of liquidity on both its own balance sheet and those of its Partnerships. The elevated level of liquidity may decline if GMG continues to increase the use of its balance sheet for developments. However, the liquidity position will be supported by ongoing retention of capital. This is evidenced on the full-year dividend being maintained. The retained capital is likely to be used in the development pipeline.

Fundamental View

The shares are currently trading on a 1-year forward P/E multiple of 22x. This is not demanding in the context of an EPS growth profile of +9% over FY23-26 on a CAGR basis. In addition, there is also upside risk to the latter figure, as outlined above.

Charting View

On 20 June in The Dynamic Investor report, we made the following charting comment:

“GMG has trended well since the October low. Now we are seeing the formation of a “cup and handle”. This is a bullish sign and the breakout from the past few days on good volume now implies that GMG will most likely crack the February high and continue on. Current levels are therefore a buying opportunity.”

It took an extra few weeks to break above that high, but it finally did so on 18 August. Short-term the stock is looking overbought and we should see some form of consolidation here. Therefore, those looking to purchase should wait for a consolidation. However, longer term it is likely to continue trending higher.

Goodman Group (ASX:GMG) daily chart
Goodman Group (ASX:GMG) daily chart


Michael Gable is managing director of Fairmont Equities.


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