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Urban Consolidation Inspires Goodman Group

Australia | Jun 18 2018

This story features GOODMAN GROUP. For more info SHARE ANALYSIS: GMG

Supply constraints in urban locations are triggering demand for multi-storey assets and this is supporting Goodman Group's development portfolio.

-In some instances weightings to industrial assets have tripled
-Ability to continue delivering sector-leading earnings growth
-Can the stock still outperform peers?

 

By Eva Brocklehurst

Substantial opportunities for urban renewal are underpinning Goodman Group ((GMG)) and the company has highlighted this scenario at its investor briefing.

The need for proximity to urban areas by e-commerce and logistics providers has underpinned tenant requests for prime assets. As supply constraints in urban locations exist, multi-storey assets are being developed, aided by the improving returns when land costs rise.

Traditionally, the company points out, investors have invested in its funds on the back of real estate allocations of 7-15%. This has increased towards 10-20% and the mix has shifted to industrial and away from retail. In some instances weightings to industrial assets have tripled.

Strength in the industrial property market, particularly the US, was the theme of note for Deutsche Bank. The sector is benefiting from a push towards multi-storey warehouses to which a significant amount of capital is flowing, while automation has also charged demand for industrial assets.

Prime Industrial Assets

Goodman has emphasised prime assets and infill developments and suggested it would not be acquiring commoditised or secondary product. The company remains cautious about acquisitions, given current land prices, and Macquarie expects growth to remain organic through delivery of the current development pipeline.

As multi-storey assets can be around $200-300m in value, and some much larger ones have end values of over $1bn, the number of assets under development may contract, the broker suggests, but this should not materially affect the absolute value of development.

Despite trading above the SOTP (sum of the parts) valuation range and target Macquarie retains an Outperform rating on the stock, expecting sector-leading earnings growth will be delivered, along with balance sheet capacity that will drive a step change in the future.

Hence, the broker believes the stock can trade above valuation while still outperforming its A-REIT peers. Ord Minnett disagrees, downgrading Goodman to Lighten from Hold.

The business is in great shape and the balance sheet strong and the broker agrees the company is benefiting from two robust themes – global e-commerce growth and increasing density in cities, particularly Sydney.

Yet Ord Minnett considers the stock expensive, trading at 2.2x net tangible assets and at 19.3x FY19 estimated PE multiples. The broker also has concerns about the quality of earnings growth, amid elevated development margins and increasing performance fees.

Primed For Disappointment?

Industrial transactions are now the "flavour of the month" Ord Minnett asserts, and B and C-grade properties are trading at A-grade prices. The point is made that not all industrial assets are equal and the market may not be differentiating.

At some stage such assessments are likely to lead to disappointment, in the broker's opinion, provoking a de-rating from the current positive sentiment around the asset class.

Citi believes its bull case scenario for the stock is underscored by this latest briefing from the company and reiterates a Buy rating. With the disposal program now largely complete, the major headwinds for assets under management has passed.

The broker estimates assets under management could hit $60bn by FY23. To achieve this, the implied growth rate would be 12.5% per annum versus 13.6% over the past five years. To obtain this figure, Citi incorporates $7.5bn in net acquisitions, $12.4bn in completions and $6.8bn in revaluations.

FNArena's database shows three Buy ratings, three Hold and one Sell (Ord Minnett), with just four out of the seven covering the stock updating after the briefing. The consensus target is $8.75, suggesting -8.4% downside to the last share price.

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