E-commerce Makes Goodman Group Attractive

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Goodman Group represents an attractive opportunity, Shaw and Partners believes, for those looking for a stock that continues to benefit from the growing e-commerce sector.

-Sustainable performance fees amid future development opportunities
-At a time when many A-REITs lack catalysts
-Significant upside from converting warehouse space to data centres
 

By Eva Brocklehurst

Faced with mediocre expectations across the market, Shaw and Partners suggest investors need to be active to obtain reasonable, risk-adjusted returns. This involves sector and security selection playing a significant role in investment management.

Hence, the broker believes Goodman Group ((GMG)) represents an attractive investment opportunity for those looking for a stock with a strong balance sheet that continues to benefit from the growing e-commerce sector.

UBS recently upgraded to Buy to reflect the structural tailwinds from e-commerce, believing these tailwinds are strong enough to cut through global economic uncertainty. The broker also points to the sustainability of Goodman Group's performance fees, portfolio quality and future development opportunities.

UBS agrees this is a sustainable growth stock in a low bond yield environment and short-term concerns regarding Goodman Group's exclusion from several indices have largely passed. Since the stock peaked in early July it has underperformed global peers by -18%, the broker assesses, and underperformed the Australian market by -14%.

In the wake of the FY19 result, Credit Suisse downgraded to Neutral, although acknowledges FY20 looks to be another strong year in the making. External funds under management have grown 22% to $42.9bn and the company expects the development pipeline to add further $3.5-4.0bn per annum. The broker also notes the self-funding business model is now in full operation.

Credit Suisse acknowledges a conundrum in whether to consider the stock a fund manager or an "expensive REIT". At a time when many A-REITs (Australian Real Estate Investment Trusts) lack earnings catalysts the broker expects the stock will retain investor support.

Shaw considers Goodman Group an integrated real estate group (rather than a REIT) that owns, develops and manages industrial and commercial property including warehouses, logistics facilities, data centres and offices and has derived more than 70% of earnings in FY19 from active investments.

The broker, not one of the seven monitored daily on the FNArena database, initiates coverage with a Buy rating and $15.25 target, expecting Goodman Group to deliver operating earnings growth of over 9% for the next three years.

Shaw observes, over the last decade, growth has been supported by both the management and development divisions. The company remains prudent about investments and developments, despite the structural shift to online and convenience shopping, which has resulted in significant rise in demand for industrial property.

Management is likely to be the driver of growth over the next three years, while performance fees are also expected to be sustained at current levels, with the company reporting a total return of 15.5% over the last six years.

UBS also notes substantial embedded performance fees and anticipates a higher level of sustainable performance fees than the market has factored in going forward. In FY19 the company generated $600m in development profits that should drive performance fees in later periods.

The main downside risk in the near term is a potential second strike on the remuneration structure, Shaw asserts. Management has attempted to address concerns by introducing an operating performance hurdle range of between 6-9% over a three-year period.

Ord Minnett differs in its view and believes the business is over-earning, despite being well run and retaining strong near-term growth prospects. Multiples are considered elevated, although the broker forecasts growth in earnings per share of 10% in FY20 and 8% in FY21.

Data Centres

Shaw believes there is significant upside for the company to convert some of its existing warehouses into data centres, which has not been priced into valuation. It remains difficult to assess this, given the early stages, but it should be an expanding theme, particularly in Hong Kong.

Data centre rents in Hong Kong are double industrial warehouse rents. However, the broker does highlight the rising risks in Hong Kong from geopolitical issues. The company's Hong Kong portfolio is currently valued at $7.5bn.

Currently a premium is required to be paid to the Hong Kong government when converting an industrial site into a data centre.

Dark Stores

Online grocery has grown significantly over the last four years and, despite this, most orders are still picked and packed from supermarkets. The number of “dark” stores (online shopping warehouses) being opened has been minimal so far and Shaw believes there is significant room for dark store growth in Australia, given the trends overseas.

Woolworths ((WOW)) opened its first dark store in 2014 and a further two stores have opened since then. Coles ((COL)) now has two dark stores, one in Melbourne and one in Sydney.

FNArena's database has three Buy ratings, one Hold (Credit Suisse) and one Sell (Ord Minnett). The consensus target is $15.44, signalling 11.2% upside to the last share price. Targets range from $12.20 (Ord Minnett) to $17.60 (Citi).

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