Developments Peaking For Goodman?

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Goodman Group stands out as solid performer in an uncertain environment, but brokers anticipate the percentage of development work in its portfolio is close to peaking.

-Pace of completed work growing at reduced pace
-Support for industrial real estate robust
-Highly leveraged to growth in e-commerce
 

By Eva Brocklehurst

The scale and length of development projects stand Goodman Group ((GMG)) in good stead in a period of exacerbated uncertainty. Among the $3-4bn in development projects currently in various stages of negotiation, there is one expected to take five years to develop over multiple stages.

Moreover, the company has signalled an increase in demand for both temporary and permanent space. Support is also coming from trends in e-commerce, data usage and higher inventory levels, Macquarie points out.

Work in progress stands at $4.8bn, up 12% quarter on quarter, and occupancy at 97.5%, although leasing across the portfolio has slowed down. Nevertheless, UBS assesses market concerns have been dissipated by the amount of development projects on hand, while the timing is less clear.

The company continues to focus on growth opportunities in markets where land is constrained and disposing of non-core assets. Comparable operating income growth of 3% and FY20 earnings growth of 11% have been reaffirmed.

Development Slowing

Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, considers the business is not completely immune to the downturn. Although work in progress has grown by $1.2bn over the last 18 months the pace of work completed is growing at a reduced rate.

This drives the broker's forecast reductions in development net revenues as a percentage of work in progress. UBS agrees development income appears close to a peak and management and investment income must do the heavy lifting going forward.

Ord Minnett also expects development margins will fade in terms of significance in forecasts, while assessing FY22 growth will be predicated on development activity and maintenance of margins. Still momentum remains strong in FY20 and FY21.

The broker calculates growth in the March quarter stemmed from China and Australia and currency likely contributed 9%. There is minimal impact from tenant distress to date, as Goodman Group has indicated April rent collections were within 2% of normal levels.

Surplus Cash

Macquarie notes several positives for the investment thesis, such as structural benefits over the medium term, a solid balance sheet and capital flows that benefit fund management models.

Credit Suisse points out, while not expecting a global pandemic, Goodman Group was preparing for a downturn through maintaining low gearing, holding surplus cash and funding growth through capital recycling. There is $1.4bn in surplus cash and $1.1bn of undrawn debt, which more than covers medium-term debt expiry, and within the funds platform there is $18.8bn of liquidity.

The broker finds capital discipline a positive, despite the criticism from some quarters that the company's attitude to capital is "lazy".

Many sovereign wealth and pension funds remain relatively underweight on industrial real estate. Hence, Credit Suisse suspects Goodman Group is unlikely to find it difficult to attract third-party capital over the longer term in order to fund growth.

However, the stock does not screen cheaply on an earnings multiple basis and the broker suggests any dips in price could provide a more attractive entry point.

Goldman Sachs, while acknowledging the business has been positioned well for a downturn, has a Sell rating with an $11 target, assessing earnings are highly leveraged to movement in capitalisation rates (income relative to market value).

A global recession along with downward re-pricing of risk assets means the broker finds it hard to believe the portfolio will be completely immune to softening cap rates. Goldman Sachs bases its forward estimates on 25 basis points of cap rate expansion, which compares with -200-257 basis points of tightening over the last five years across regional portfolios.

FNArena's database has three Buy and three Hold ratings. The consensus target is $15.36, suggesting 5.0% upside to the last share price.

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