Australia | May 16 2019
Industrial property developer Goodman Group is increasingly confident in the opportunities inherent in its global land bank, reaffirming a robust outlook.
-Market expectations remain high and stock priced accordingly
-Elevated development margins and performance fees continue
-High level of work expected to be sustained for some years
By Eva Brocklehurst
Global demand for well-positioned industrial property continues apace and developer Goodman Group ((GMG)) is in the box seat, with work in hand expected to approach $5bn by FY20, as two large development projects in Hong Kong get underway.
The company has flagged high-quality locations in its land bank and the increasing scale of developments, reaffirming FY19 guidance for 9.5% growth in earnings per security and distribution growth of 7%.
UBS notes a solid capital position is allowing the company to unlock opportunities in gateway cities with increasing conviction and the outlook commentary is very bullish, despite the March quarter been slower than usual.
Development pre-commitments have fallen to 52%, the lowest level on record, as buoyant tenant markets provide the confidence for more speculative projects, and Ord Minnett points out Australasia and Europe remain at record lows in terms of pre-commitments.
Several brokers point out that market expectations remain very high and the stock is priced accordingly. Goodman Group is expected to outperform the A-REIT sector and Macquarie suggests the market is also likely to reward strong fundamentals and superior earnings growth over the medium term.
Shaw and Partners, not one of the eight stockbrokers monitored daily on the FNArena database, is unconcerned about the company's ability to generate attractive development returns, performance fees and earnings growth, yet believes the stock is expensive on valuation grounds, retaining a Sell rating with an $11.30 target.
As, overall, market uncertainty is highly evident, the broker acknowledges that sentiment could remain positive because of the strong balance sheet and leverage to e-commerce.
Most of the company's managed funds are in the money and Ord Minnett agrees further capitalisation rate (income versus asset value) compression in Australasia should underpin elevated development margins and expansion in performance fees out to FY21.
The bulk of performance fees in the first half came from continental Europe, having been predominantly from Asia in the prior corresponding half. For FY20 Ord Minnett forecasts performance fees to lift to $174m, equivalent to 40 basis points of assets under management and representing 35% of management revenue.
High Value Projects
High-value projects are expected to commence across Asia and Australia in the coming year and a high level of work will be sustained for some years because of the long life nature of the projects. Total assets under management (AUM) are expected to exceed $45bn by the end of this financial year.
During the March quarter, AUM increased by $1.2bn while external (third party) assets under management grew by $800m. Credit Suisse assumes the company can reach $51.8bn in external assets under management by June 2021, underpinned primarily by completed developments.
Macquarie expects FY20 to be a bumper year. The stock may appear expensive relative to history but the broker notes it is trading below its growth peers in Australian equity markets. In addition, Goodman Group's earnings profile is less risky. Development yields around 7% versus portfolio yields of around 5%, indicate margins are robust. This will be the focus, UBS asserts, as the company expands its land bank globally.
FNArena's database has three Buy ratings, two Hold and one Sell (Ord Minnett). The consensus target is $13.30, suggesting -1.1% downside to the last share price. Targets range from $11.50 (Ord Minnett) to $14.57 (Macquarie).
Goodman Property Trust
NZ-listed Goodman Property Trust, which specialises in the Auckland industrial market, has sold its last remaining non-Auckland industrial asset. The issue for brokers now centres on stimulating cash earnings growth.
UBS suggests growth could be achieved through value-added investments but also notes, despite favourable industrial market fundamentals, material increases in rent growth are not evident. Yet demand for industrial sites remain strong, manufacturing sales growth is positive and primary and secondary vacancies are substantially below long-term averages.
Macquarie observes the high-quality Auckland industrial portfolio is the best in the sector, albeit under-rented, but the stock's valuation has become more challenging, downgrading to Neutral from Outperform. The broker believes the business is positioned for long-term upside, although acquisitions may not be significantly accretive in the near term.
Credit Suisse downgrades Goodman Property Trust to Underperform from Neutral on valuation, although expects New Zealand's low interest-rate environment will continue to support the stock in the near term. Goodman Group has a strategic 20% stake in Goodman Property Trust.
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